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High yield ETF volumes hitting new highs in more volatile markets, says Fitch

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High yield (HY) corporate bond ETFs are continuing to gain favour among HY investors, according to Fitch Ratings. This likely reflects investors' liquidity preferences during a period of elevated HY market volatility and falling bond prices during 2015 and the beginning of 2016.

Trading volumes of HY ETF shares have risen relative to the trading volumes of HY bonds over the past year, spurred by concerns over a potential China slowdown and continued commodity price pressures. The trading ratio of HY ETF shares to HY bonds reached a record high of 42 per cent on 11 December, 2015, and subsequently reached above 20 per cent on several days through end-February.

"This is a striking shift in the market considering HY ETF assets were just USD34 billion at the end of February – much lower than the USD1.2 trillion of HY bonds outstanding," says Robert Grossman, Managing Director, Macro Credit Research.

This shift has occurred during a period in which dealer bond inventories continued to fall steadily. Banks, responding to financial regulation, have cut bond holdings, reducing their role as market makers. As a result, many market participants have used ETFs to access the broader HY bond market.

The use of bond ETFs by investment grade (IG) investors has been much less extensive for both IG corporate and treasury bond ETFs. The trading ratio between IG corporate ETF shares vs IG corporate bonds has remained mostly steady in recent months, around 10 per cent.

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