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Retail investors continue to exit high yield bond funds, amid fears that the asset class’s bull run may have run its course.
Withdrawals from high-yield bond funds reached $4.8bn this week, according to a Bank of America Merrill Lynch survey, based on data from EPFR Global.
Thats the largest weekly outflow since June last year, when bond markets were spooked by the U.S. Federal Reserve’s hint that it would start to taper its quantitative easing, and tops last weeks outflow of $2.7bn which was the largest weekly outflow for the sector since last August.
The latest survey, based on data from EPFR Global, found that investment-grade bonds funds had recorded inflows of $4.2bn, their 31st straight week of inflows, as investors sought safety over yield.
High-yield outflows across the globe accelerated following the recent warning from Fed chair Janet Yellen that valuations for high-yield bonds “appear stretched”.
Jim Reid, credit strategist at Deutsche Bank, told the Financial Times. “although U.S. high yield had been struggling in terms of performance this month, there had not been broader signs of stress yet.”
High-yield outflows seemed to have been significantly driven by ETFs, he added, suggesting that retail money was largely responsible for the last two weeks of outflows.
Mr Reid said it was worth noting that the high-yield primary market remained open, with a further $1.3bn priced across three deals on Thursday, though he was keeping an eye on potential cracks in the market.
Todays Other Top Stories
LearnBonds: – Chevron: Hold this “dividend aristocrat”. – Chevron, one of the largest integrated oil and gas companies in the world, has earned the title of a “Dividend Aristocrat” by increasing its dividends for 28 straight years. But as the stock price is vulnerable in the near future, I’m rating it a “hold” instead of a “buy”. First, let’s look at why I think current investors should continue to hold the stock.
MuniNetGuide: – Muni Revenue Bonds: Lessons from Detroit and Puerto Rico. – The municipal market was able to regain some relative performance against Treasuries over the last few days, as investors were encouraged by a recovery in mutual fund flows and a rebound in Puerto Rico bond prices. Whether the recent PR rally will turn out to be just a “dead cat bounce” from oversold levels remains to be seen, however.
Bond Buyer: – Commentary: The municipal bankruptcy crisis — Lessons from Detroit. – When Detroit filed Chapter 9 municipal bankruptcy with a debt of $18 to $20 billion, it was the largest municipal bankruptcy in US history, dwarfing its predecessor (an Alabama county with $3 billion of sewer bonds). Detroit presents a study in the lessons of a large municipal bankruptcy. These lessons are timely given continuing concerns with respect to the municipal bond market.
Reuters: – Passive to a point: ETFs stray from index to sell Puerto Rico debt. – Puerto Rico’s worsening debt crisis is pushing the managers of some municipal junk bond exchange-traded funds to ditch their mandate for passive management. Instead, they are straying far and wide from benchmark indexes as they try to avoid taking a hit on the island’s bonds.
Bloomberg: – Window closing to challenge Wall Street over swaps. – The clock is running out on a way for U.S. states and cities to try to recoup payments to Wall Street on bond deals that blew up in the financial crisis.
The Economist: – The clock is ticking toward an Argentine default. – Its steakhouses bustle, its shopping malls teem. There are few signs that, on July 30th, Argentina could default for the eighth time. Yet the chances are rising.
FT: – Bubbles are forming in the credit market. – JPMorgan’s chief market strategist, suggests that future bubbles often appear in asset classes that have expanded the fastest.
WSJ: – IMF official warns of bond risk. – High-yield U.S. and European corporate bonds may be overpriced and emerging-market bonds are at risk if borrowing costs rise faster than currently expected, the International Monetary Fund’s top financial counselor said Friday.
ETF Daily News: – Are Treasurys about to spike? – It pays to stay diversified among many asset classes, including bonds. Today, I’m seeing signs of U.S. Treasurys strengthening relative to corporate bonds (and probably in absolute terms as well). We can find out which one is likely to outperform the other by looking at a relative strength chart of two ETFs.
Global Finance: – U.S. Treasury bonds fall on upbeat economic data. – U.S. Treasury prices pulled back Thursday on an encouraging labor-market report, tilting the 10-year yield back above 2.5%.
Investing.com: – The 10-year Treasury yield could drop under 2.4%. – With each passing day it seems the bearishness towards bonds refuses to ease. Surveys by economists still show a heightened distrust for the Treasury market, even though prices have marched higher for the bulk of 2014. When we look at the weekly chart of the U.S. 10-Year Treasury (TNX) we can see that support may be under 2.4%, and if prices do in fact break 2.4%, that may open the next wave of shorts to get squeezed.
High Yield Bonds
Citywire: – Watchdog warns investors over corporate bonds. – The Financial Conduct Authority urges consumers to consider the dangers of owning corporate bonds as interest rates start to rise.
MoneyBeat: – Options show rising concern over high-yield bond ETFs. – The options market is flashing concern about high-yield bond exchange-traded funds. Demand for protective “put” options in the market’s largest high-yield bond ETF versus bullish options this month crept up to its highest level since May 2013’s “taper tantrum,” when hints from the Federal Reserve on changes to its bond-buying program sent high-yield bonds, and other rate-sensitive assets, reeling.
ETF Guide: – Why the faltering junk bond market may signal deeper problems ahead. – Not many have noticed but the performance of high yield bonds (also known as “junk bonds”) are breaking down. The decline in high yield corporate debt has been modest (-1.5%) thus far, so it’s still flying under most radars.
ETF Trends: – The angelic ETF way to high yield bonds. – Sometimes, people deserve a second chance. Perhaps the same is true of bonds, particularly the high-yield variety, with the second chance being another crack at an investment-grade rating.
FT: – Junk bond returns head for worst month in nearly a year as bull run stalls. – Junk bonds are on track for their worst monthly return in nearly a year, with investors fretting the era of easy US central bank money is at an end and calling time on a bull run for one of the market’s riskier asset classes.
WSJ: – Investors retreat from junk bonds. – Investors are selling junk bonds at the fastest pace in more than a year, as fresh interest-rate fears and geopolitical turmoil amplify valuation concerns following a long rally.
Redwood Management: – A cacophony of fears emerge in high yield. – I’ve been speaking with colleagues a fair bit lately about high yield debt and the potential for losses in this area, after an amazing multi-year run for those invested in the space. While in general, I don’t believe that you will have a broad sell off in high yield, independent of equity market declines, there is some risk we could see a widening of spreads created by investors leaving high yield after a superb run from 2009 to date.
Reno Gazette: – Interest in emerging markets is now rising. – This week, some investors are turning to emerging market bonds as interest rates in the U.S. and Germany near all-time lows. Just this week, the interest rate on the 10-year U.S. Treasury bond fell to 2.47 percent, with the 10-year German Bund offering 1.15 percent.
The Street: – Bond investing strategy shields against rising interest rates. – For an investor, the question of how long rates remain at today’s lows isn’t insignificant. Believing that there will be no change for a year or two prompts an investor to take more risk, perhaps lengthening bond maturities a bit to capture more yield while not, just yet, subjecting principal to rate risk. But if one thinks rates will rise, then by all means keeping maturities short is the thing to do.
Gross:Why Treas yield ↓? S Amer/Euroland on ropes, Japan/China in credit frenzy, Russia nearing recession. Mideast @ war. Anything else?
— PIMCO (@PIMCO) July 25, 2014
2s30s at 276bps roughly 10bps from erasing the full taper tantrum steepening (peaked at 363bps in November)
— David Schawel (@DavidSchawel) July 25, 2014
The make-up of the large #municipal investor in recent months is increasingly hindering Street activity. More in Monday’s Issuer Brief.
— Muni Market Advisors (@Muni_Mkt_Advis) July 25, 2014