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Investors are continuing to exit high-yield bond funds, pulling another $2.4 billion out of the sector in the week ending August 13, marking the fifth straight week of withdrawals according to data from Bank of America Merrill Lynch.
This comes in stark contrast to bond funds overall, which attracted net inflows of $3.8 billion, marking their biggest inflows in six weeks, according to the report, which also cited data from fund-tracker EPFR Global. Funds that mainly hold U.S. Treasuries attracted $2.2 billion in new cash.
To see a list of high yielding CDs go here.
But as investors rush out of junk, some funds are taking the opportunity to jump back in, with analysts saying high-yield now offers fair value. Begging the question, how risky is high-yield right now?
Head of fund research at Brewin Dolphin, Ben Gutteridge said the market’s response to the sector, for now at least, is not the signal of something more worrying, but equally it is not a good time to be adding to existing holdings.
While much of the outflows so far have been a result of investors switching out of high yield into safer money-market and government bond funds, Gutteridge believes we have seen the bulk of the selling.
“A general improvement in economic performance and corporate profitability leaves us doubtful that investors will sacrifice the yield currently on offer in high-yield bonds in order to move into cash or government bonds. We are also sceptical that holders of high-yield bonds would be motivated to switch into equities, given the pervasive overweight that already exists in this asset class,” he said. But in the short-term, volatility is set to remain.
“An illiquid trading environment has exacerbated price declines that first began in June on profit taking and then continued through July as equity markets remained volatile on a host of concerns from geopolitics to earnings to the economy,” said investment strategist for LPL Financial, Anthony Valeri.
“While high-yield volatility has startled some, we view it as a natural market correction. High-yield bonds may remain volatile near term, but if the average yield (which is now 5.9 percent) increases, it should help bring out demand given still-low yields across high-quality bond markets,” he said.
Todays Other Top Stories
LearnBonds: – Goldman Sachs Stock – Buy and hang on for the ride! – When it comes to investing in Goldman Sachs, it’s all about the timing. If you get in when the stock is overvalued, you might be in for a punch in the face.
Reuters: – U.S. municipal bond trading torpid in second quarter. – Traders slammed on the brakes in the U.S. municipal bond market during the second quarter of 2014, with the amount of debt changing hands down more than 10 percent from a year earlier,Municipal Securities Rulemaking Board data released on Thursday showed.
Kahn Litwin: – Benefits of municipal bonds. – Looking to acquire interest at a tax free rate? Municipal bonds or “munis” are attractive to high income investors for this reason. Munis are debt obligations distributed by cities, counties, states, and other governmental units to private investors and are used to purchase services for the public, including schools, highways, and hospitals. These bonds are exempt from federal taxes and the majority of state and local taxes.
HedgeWorld: – Hedge funds jumping into Puerto Rico muni bonds. – More than 60 alternative fund managers hold more than $16 billion of Puerto Rico debt as hedge funds and distressed debt investors dislodge traditional mutual funds in the island’s debt market, according to a report by Fitch Ratings on Wednesday.
Bloomberg: – Puerto Rico Electric Authority wins bank loan extension to March. – The Puerto Rico Electric Power Authority, the main supplier of electricity in the struggling U.S. territory, said it agreed with creditors to delay repayment of bank loans until March.
ABC News: – What happens to bonds when everyone aims to sell? – If bonds start to tumble, should I sell my bond mutual fund? It’s a question investors are asking as expectations rise for a more volatile bond market. But a better question may be: How difficult will it be for my fund manager to sell?
Bloomberg: – U.S. Investment outflow hits record as China cuts holdings. – The U.S. posted a record cross-border investment outflow in June as China and Japan, the two biggest foreign holders of Treasuries, reduced their holdings of U.S. government debt.
Reuters: – Foreigners shun U.S. assets in June; sell Treasuries, corporate bonds. – Foreigners sold long-term U.S. securities in June, including U.S. Treasuries and corporate bonds, reversing inflows in the previous month, data from the U.S. Treasury Department showed on Friday.
MarketWatch: – Time to short the bond market or the stock market? – At a certain point we’re going to have to short the heck out of the long-term U.S. Treasury bond, right? Not so fast.
WSJ: – Treasury bonds higher on U.S. data. – U.S. Treasury bonds edged higher Friday, as the latest inflation and manufacturing reports bolster investor expectations that the Federal Reserve will be patient in raising interest rates.
WSJ: – Banks, financial firms load up on cheap debt. – Banks and other financial companies world-wide are issuing bonds in the U.S. at a record pace, taking advantage of this year’s surprising slump in interest rates and a brightening outlook for the sector.
High Yield Bonds
WSJ: – Investors pour $680 million into U.S. junk bonds in latest week. – Investors poured $680 million into funds dedicated to low-rated corporate debt in the week ended on Wednesday, according to fund tracker Lipper, snapping four weeks of declines that included the previous week’s record $7.1 billion weekly outflow.
Deal Book: – The signals from the high-yield bond market. – There’s a saying on Wall Street that the bond market is smarter than the stock market. The saying may, or may not, be true. But when the paths of stocks and high-yield bonds – which have similar risk profiles – diverge, Wall Street pays attention.
Senti Rate: – Junk selloff means buy at Barclays to Citigroup. – The $1.4 trillion market for U.S. junk bonds is looking cheap to a growing number of investors and strategists following a selloff that pushed yields to the highest levels since November. Barclays Plc recommends adding “exposure” to speculative-grade debt after small investors withdrew more than $20 billion from mutual funds that focus on the securities over a 25-day period ended Aug. 8.
TheStreet: – Massive outflows do not spell doom for the high-yield market. – The high yield bonds being sold by retail investors in the past month are being scooped up by institutional buyers seeking deals, said Tim Gramatovich, portfolio manager for the AdvisorShares Peritus High Yield ETF. Gramatovich said the default rate remains low because nothing has fundamentally changed for this space or for the underlying companies.
Interactive Investor: – Equities beating becalmed bonds in tactical asset allocator. – One asset class in the news in the past month has been emerging market bonds, as the market nervously awaited developments in the stand-off between the Argentine government and investors in its $95 billion bond default.
Buenos Aires Herald: – Debt talks collapsed over price, guarantees. – Debt talks on Argentina’s defaulted bonds in the hands of holdout hedge funds ultimately collapsed yesterday due to disagreements over prices and the absence of a government guarantee to honour payments on the paper, sources close to the discussions said.
Dividend Channel: – Top 10 ranked high yield REITs. – Top ten must know high yield Real Estate Investment Trusts.
ETF Daily News: – Beware of cash outflows in these ETFs. – Large cash outflows may signal trouble in these sectors. Whenever there are large outflows or inflows into various sectors, usually notable by proxy through sector ETFs, it can tip investors off to changes in psychology. Sometimes large movements of money, which often come via large institutions, can tell you that a big move is coming in the sector. Inflows may suggest a big up move, while outflows may suggest a big downward movement.
ETF.com: – Floating rate bond ETFs back in vogue. – With 10-year Treasury yields sliding, and longer-dated debt looking prospective again as the Federal Reserve signals that an interest rate hike isn’t as imminent as the market had originally expected, floating rate bond ETFs have been out of favor for much of this year. But now that tide seems to be turning.
Gross: Global deflation: South America/Euroland/Japan in recession. Russian geopolitics will not help. Own Treasuries.
— PIMCO (@PIMCO) August 15, 2014
4wk moving average now over $400mn in muni mutual funds. Inflows at HY funds cont to be robust.Over $250mn of inflows, up from $60mn last wk
— Nicola Theron (@nicolatheron) August 15, 2014
— Cate Long (@cate_long) August 15, 2014