Tuesday, March 8, 2016

Investors pile into US junk bond funds

Investors piled into US junk bond funds at the fastest pace on record as a relief rally in global equity and fixed income markets coaxed fresh money off the sidelines.
US funds invested in high yield debt counted $5bn of inflows in the week to March 2, the greatest seven-day haul since record keeping began in 1992, according to fund flows tracked by Lipper.

Flows tracked by EPFR also showed the largest weekly shift into high yield bond funds since the group began tracking the asset class in 2003. Investors instead sold off positions in Treasuries, with shorter dated notes notching the largest withdrawals since the fourth quarter of 2014.The moves highlight an easing of investor anxiety after a string of better than expected economic reports in the US, a stabilisation in crude prices and the view that central banks in Europe, Japan and China are prepared to provide further economic stimulus if needed. 

“People are a little less concerned about China and there’s less talk about recession in the US,” said Sabur Moini, a high yield portfolio manager with Payden & Rygel. “Generally the tone is much better, valuations are certainly attractive and that is why you have money coming in.”
US equity funds continued to suffer withdrawals, although exchange traded funds buying large and small capitalisation stocks counted inflows at the start of March. European equity funds also counted redemptions, while emerging market equity funds recorded their first inflows since last November. 
“With investors expecting the European Central Bank to boost its quantitative easing programme and the US Federal Reserve to keep interest rates on hold when those bodies meet mid-month their risk appetite climbed another couple of notches in early March,” said Cameron Brandt, EPFR director of research.
The record move into junk bond funds, which buy debt from companies rated double B plus or lower by one of the major rating agencies, has buoyed prices and sent yields lower. Yields fall when bond prices rise.
Junk bond yields slid to 8.73 per cent on Thursday from a recent high of 10.1 per cent hit in mid-February, when a global market sell-off reduced new bond issuance to a trickle. The recent rally has spurred multibillion-dollar debt sales from ExxonMobil, eBay, Johnson & Johnson, AIG and Cisco Systems.
The gains have nonetheless been concentrated in the highest rated junk bonds, particularly those rated double or single B. The difference between the yield of the average issue in the Bank of America Merrill Lynch index of double B rated companies and benchmark Treasuries has declined more than 25 per cent in the past three weeks to 434 basis points.
Spreads on triple C and lower-rated paper have fallen just 8 per cent from a February peak to 1,901 basis points. Yields on that debt remain above 20 per cent, as investors predict a surge in defaults by energy and metals and mining companies.
The US junk arena has since turned positive for the year, reversing losses sustained through mid-February. 
“Things seem better, but again the question is is this sustainable? Is this ephemeral? Does this last? Do people take advantage of this rally and sell,” Mr Moini added.
“Markets are driven by sentiment, animal spirits and momentum . . . We have employment numbers on Friday and the Fed in a week-and-a-half. That will all be critical.”

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