# XHB -- WTF!



## fireseeker (Jul 24, 2017)

XHB, the high yield corporate bond ETF, has been ticking higher all year as rates have dropped. 
It hit its 52-week high this morning.
Then, this afternoon, it plummeted to its 52-week low -- from $21.70 to $17.95.
As I write, it is down 15%. 52-week high and low in the same day.
These are bonds!!!


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## james4beach (Nov 15, 2012)

fireseeker said:


> These are bonds!!!


Correction: they are *risky* bonds. Largely BBB or borderline junk.
https://www.canadianmoneyforum.com/...porate-bonds?p=2077306&viewfull=1#post2077306

You will notice that high grade bonds are doing much better today. Unfortunately it seems that the market stress has gone beyond just equities. It's also now affecting currencies, commodities, and lower grade corporate paper.

This is one of the problems with lower grade corporate paper. You get a performance and yield boost during good times, then you give it back in bear markets.


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## AltaRed (Jun 8, 2009)

^+1 High yield corporate bonds act more like equities in a down draft. If one is going to invest in corporate bonds, pick an ETF that is centered more on A rated bonds, and at worst BBB+. The trouble with BBB is that is only 2 steps to junk and a head spinning price drop.

XHB is 82% BBB https://www.blackrock.com/ca/indivi...rate-bond-index-etf-fund-fact-sheet-en-ca.pdf

Most of those would be BBB+ out of the 3 BBB ratings so think there is an overreaction to the downside. Pipelines et al with COS and regulated revenues are not going to default.


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## james4beach (Nov 15, 2012)

AltaRed, do you have any concerns about XBB? Personally I think its corporate exposure seems very reasonable & safe but would love a second opinion.

iShares web site shows
Fact sheet PDF
https://www.blackrock.com/ca/individual/en/products/239493/ishares-canadian-universe-bond-index-etf

AAA ... 37.57%
AA ... 36.96%
A ... 14.15%
BBB ... 11.19%

That's 89% in A or above

The most corporate paper I hold is in XBB. All the rest of my fixed income is in pure government bonds and GICs.


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## AltaRed (Jun 8, 2009)

No concern from my perspective at all....


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## james4beach (Nov 15, 2012)

AltaRed said:


> No concern from my perspective at all....


Thanks


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## fireseeker (Jul 24, 2017)

james4beach said:


> Correction: they are *risky* bonds. Largely BBB or borderline junk.


Absolutely. No disagreement about that.

What I was pointing out was a) the whipsaw and b) the sudden change of direction.

During the two weeks from Feb. 24 to March 6, XIU dropped from 26.23 to $24.27 (on close). That's down almost 8%.
Meanwhile, over the same period XHB moved from $21.35 to $21.62. That's up more than 1%.

Until today, XHB was not moving with equities. Today, it got slaughtered. Bonds, even high-yield bonds, do not normally move like that. 

The explanation may be that XHB has 40% of its holdings in the energy sector. Still, the move is bananas.


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## AltaRed (Jun 8, 2009)

XHB was moving higher due to the 50bp interest rate cut. BBB corporates are leveraged and need lower debt servicing costs to perform.

Today, it is about credit quality and risk of default.


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## fstamand (Mar 24, 2015)

It's a huge selloff day. Many people (like me) exchanged their bonds for cash or other equities.


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## OptsyEagle (Nov 29, 2009)

james4beach said:


> AltaRed, do you have any concerns about XBB?


Would there be ANYTHING in that ETF that is not currently trading above its maturity value that is guaranteed to lose exactly that amount as they get closer to maturity.

I know I seem to have a negative bias pertaining to bonds, these days, but I just don't see what their attraction is at these interest rates. The market has given you years of return in just the last few weeks, why give it back by holding on to it?


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## peterk (May 16, 2010)

fireseeker said:


> Absolutely. No disagreement about that.
> 
> What I was pointing out was a) the whipsaw and b) the sudden change of direction.
> 
> ...


Yeah that's weird. Compare with JNK.

JNK started falling slowly 2 weeks ago, with stocks, and then crashed more today, as expected.

XHB creeped higher for 2 weeks, and, weirder, stayed high for 1 hour this morning... and then finally dove 19% (why so much? JNK dropped only 5%)


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## james4beach (Nov 15, 2012)

peterk, I think that's the nature of contagion. What happens in financial crises is that the problems start in some obvious areas (or hit) the weakest areas first.

But as contagion spreads to other assets, it eventually hits the next most vulnerable, then the next most vulnerable thing. This would explain why stocks and junk bonds would go first, but BBB corporate bonds could seem OK for a while... until eventually, people turn on them and also sell BBB.

Similar things happened in the 2008 crisis. There was a progression, like this:
1. low grade mortgage paper (what we think of as the "core problem")
2. higher grade mortgage paper
3. lower grade bonds generally
4. higher grade bonds (like LQD)

So the problem worked its way up the scale until eventually it was causing even highly rated corporate bonds to crater. Rightly or wrongly.

In credit markets, it usually is "rightly" because there are not dumb markets. What's probably happening is that institutions are evaluating the prospects of these BBB rated companies. They are getting ahead of the ratings agencies and probably downgrading them in their models. This wouldn't have happened until the oil catastrophe over the weekend.


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## john.cray (Dec 7, 2016)

If junk bonds dropped because of credit quality concerns, then I wonder if anyone can explain the drop in XQB (iShares High Quality Canadian Bond Index ETF) by -1.22% today.

It has A and above rated bonds in it. Lots of financials but still A.


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## OptsyEagle (Nov 29, 2009)

james4beach said:


> But as contagion spreads to other assets, it eventually hits the next most vulnerable, then the next most vulnerable thing.


Eventually, if a bear market goes deep enough, everything goes down with it. That is because, investors always overdo it when it comes to pushing investments, both up and down. When an investor sees that a particular security is way undervalued, many times they can only sell something that held up quite well, to acquire the money to buy this undervalued investment. Even if that investment is of lower quality if it sports a much higher reward to risk, then the safer one, they will sell the safer one to buy the riskier. That is the behaviour that drives the prices of even good investments lower, during these times.

So remember, if a bear market gets deep enough, everything eventually goes down. It works like that in the stock market, so I assume it has some similar qualities in every market, including the bond market.

The high yield market went up initially on Monday, because of the idiots that think that when stocks go down, bonds go up, without any notice that it does not always happen everyday and that there are big differences from one bond to another. Once the stupid money was done buying their high yield bonds, the smarter money came in and removed some of that money from their possession. There is a cost to the lessons one learns in this game. All I can say to the investors affected here, is try not to take the course twice. The lesson is simple. Corporate bonds are not governments. Learn how they differ, why they yield more, and be a better investor.


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## fireseeker (Jul 24, 2017)

john.cray said:


> If junk bonds dropped because of credit quality concerns, then I wonder if anyone can explain the drop in XQB (iShares High Quality Canadian Bond Index ETF) by -1.22% today.
> 
> It has A and above rated bonds in it. Lots of financials but still A.


This is getting really weird. 

Blackrock reports ETF price changes by NAV.
According to them, XQB increased in value yesterday by 0.67%.

So, the market price appears to have unhooked from NAV ($22.21). Blackrock says XQB at last price ($21.78) is 1.7% discounted to NAV!

Again, according to Blackrock, XHB's net asset value fell on March 9 by 0.71%, or 15 cents.

The market price for XHB fell 19%, or $4.13!

If true, XHB is a screaming buy. If true, where was the market maker?

Can this be true???

Or, wait, am I looking at NAVs that are one day out of date?


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## doctrine (Sep 30, 2011)

I had some XHB. Didn't even notice the drop. I sure sold it today on the +20% rise though. Bye-bye. 38% energy bonds including some mid-caps; the bonds may not go under but they sure could turn into junk bonds and be sold at a loss.


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## fireseeker (Jul 24, 2017)

fireseeker said:


> This is getting really weird.
> ...
> XHB is a screaming buy.


So, it is pretty clear that the market maker abandoned XHB yesterday. It allowed the ETF to fall nearly 20% from NAV.

People who sold yesterday got hosed. People who bought landed the bargain of an investing lifetime -- bonds on sale for 20% off.

What do you all think? Is that OK? Caveat emptor?

And what happens if Blackrock market makers decides not to back XIU? Or if Vanguard market makers decide to wash their hands of VBAL?

Is that OK?


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