Cracks Appear in Credit Funds as Investors Head for the Exit

(Bloomberg) -- Global bond funds saw the fifth-largest week of redemptions ever last week, amid expectations of higher interest rates, according to Bank of America Merrill Lynch, citing EPFR Global fund flow data.

Overall, $14.1 billion was pulled from debt funds, with $10.9 billion taken from high-yield bonds alone, the second highest outflow on record. Investment-grade bond funds weren’t spared, with $2 billion of redemptions ending a 59-week streak of inflows, the bank said in a report covering the week to Feb. 14.

Cracks Appear in Credit Funds as Investors Head for the Exit

A separate report from Lipper also showed an exodus from riskier debt. Investors yanked $6.3 billion from U.S. high-yield junk bond funds in the past week, it said, the fifth straight week of outflows, bringing the total over that period to more than $15 billion.

“The narrative is really becoming more about inflation and rate risk creeping into the broad markets,” said Henry Peabody, a money manager at Eaton Vance Corp., with more than $400 billion of assets. “It’s hard to think of elevated volatility in both rates and equity not eventually seeping into credit.”

The 10-year U.S. Treasury yield has continued to climb this month and jumped to a four-year high Thursday after consumer price data rose more than forecast. Simultaneous outflows from investment-grade, high-yield and emerging-market bonds occurred for the first time since the U.S. presidential election in November 2016, according to Bank of America.

Despite a rebound the S&P 500 Index, U.S. equity funds continued to see outflows, BofAML said. Investors took $7.2 billion from American stocks, although both European and Japanese shares enjoyed inflows. Large-cap stocks suffered the brunt of the withdrawals.

Still, not all bond funds experienced redemptions. Funds tracking Treasuries and government bonds took in $2.4 billion of new money, according to the note.

©2018 Bloomberg L.P.