The iShares iBoxx $ Investment Grade Corporate Bond ETF LQD experienced a record $3 billion in outflows on Monday, the largest single-day exodus since the fund was launched back in 2002.
Monday's big sell-off came after the LQD fund had registered six straight weeks of inflows on investor optimism that the Federal Reserve will begin dialing back its interest rate hikes starting in December.
Just one week ago, the bond market was pricing in only a 24.2% chance the Fed will announce a fifth consecutive 0.75% rate hike in December. Today, the bond market is pricing in a 34.9% chance of a 0.75% rate hike.
Risk Ahead In 2023: Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said Wednesday that investors expecting the Fed to pivot to rate cuts in 2023 are playing a dangerous game.
"Bond markets have priced in much more risk than stock markets, and the risk in 2023 lies in the parts of the stock market (those companies with above average P/E ratios, those with lower or a lack of current profitability, and those that are interest rate sensitive), so we would remain cautious, despite the damage that has already been inflicted this year," Zaccarelli said.
The LQD fund traded slightly lower on Wednesday and is now down 0.5% in the past five days and 18.9% year-to-date, its worst annual performance ever. Much of that selling pressure has been driven by the Fed, which has significantly increased the cost of capital by aggressively raising interest rates in its battle against inflation.
Benzinga's Take: The SPDR S&P 500 ETF Trust SPY and the LQD fund have both been surprisingly resilient in the past two months, given expectations for multiple additional Fed rate hikes and expectations the U.S. economy could dip into a recession in the first half of 2023. Since Sept. 30, the SPY fund has generated a total return of 10.6%, while the LDQ fund has generated a total return of 4.5%.
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