Risk Exodus Gets Real With Biggest Fund Redemptions in 6 Months

(Bloomberg) -- An exodus from risk assets started in earnest as investors pulled billions of dollars from junk bonds and emerging markets.

A standoff over nuclear weapons between the U.S. and North Korea and racial violence in the American south triggered the biggest outflows from high-yield bond funds in almost six months and emerging markets saw their first outflow in 22 weeks, Bank of America Merrill Lynch strategists wrote in a note, citing EPFR Global data for the week ending Aug. 16.

Risk Exodus Gets Real With Biggest Fund Redemptions in 6 Months

Political chaos gave investors all the reason they needed to pare risk after lamenting for months that valuations were stretched in bond and stock markets. Waning confidence in the White House’s ability to push through a fiscal-easing agenda wobbled further after controversial remarks by U.S. President Donald Trump on the recent Virginia violence.

“Equity markets Stateside were already buckling under uncertainty over likely success of the domestic policy agenda of the Trump administration," said Jeroen van den Broek, ING Groep NV’s Amsterdam-based head of debt strategy and research.

Guggenheim Partners this week became the latest fund manager to announce it is cutting holdings of junk bonds, saying yields near a three-year low are no longer enough to compensate for risk. Investors overseeing about $1.1 trillion have cut exposure to the asset class in the past two months.

Meanwhile bond funds added $3.5 billion in a twenty-second week of inflows in the latest week, while precious metal portfolios attracted $500 million of new money. Equity funds posted their biggest outflow in 10 weeks.

“A more imminent August-September risk-off trade is plausible if poor politics shows up in consumer confidence and the dollar rises despite lower Treasury yields and a further drop in U.S. presidential approval ratings,” Bank of America strategists including Michael Hartnett wrote.