Junk-Bond Funds See Largest Cash Inflows Since December 2016

(Bloomberg) -- More than $2.6 billion flowed into high-yield bond funds during the week ended Jan. 10, according to Lipper Fund Flows data released Thursday, as investors looked to get a piece of a junk-debt rally already blowing through year-end forecasts.

The inflows, which were the sector’s highest since December 2016, according to data compiled by Bloomberg, come as junk spreads narrowed to the tightest since 2007. They’ve been spurred by a growing economy, easy credit conditions for troubled companies and investors seeking higher payouts in a low-rate environment.

“Even with the specter of rate rises this year, income is still a scarce commodity, so we continue to see inflows into credit,” said Robert Arnold, a New York-based portfolio manager at Twentyfour Asset Management.

Surging equity and commodity markets have helped compress U.S. high-yield spreads to a level just shy of their tightest since the financial crisis. 

JPMorgan Chase & Co. analysts projected high-yield spreads would tighten 20 basis points this year, and Bank of America Corp. has forecast that spreads will tighten to as narrow as 290 basis points by year-end. The figures stands at approximately 325 now.

Buyers have to overlook predictions that rising interest rates will make it harder for junk-rated companies to refinance, leading to more defaults on high-yield bonds. Retailers are especially vulnerable, with a wave of store closings and bankruptcies expected in early 2018 as the industry deteriorates faster than analysts had expected a year ago, according to Credit Suisse Group AG.

--With assistance from Faris Khan

To contact the reporters on this story: Eliza Ronalds-Hannon in New York at eronaldshann@bloomberg.net, Sally Bakewell in New York at sbakewell1@bloomberg.net.

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, James Crombie at jcrombie8@bloomberg.net, Dan Wilchins

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