U.S. Junk Bond Funds Suffer Biggest Outflow Since December

(Bloomberg) -- High-yield corporate bond funds saw the pace of outflows accelerate as the U.S. and China continued to clash over trade, souring sentiment across markets.

Investors yanked $2.57 billion from retail funds in the weekly reporting period ended May 15, according to data from Refinitiv’s Lipper. The outflow is the biggest cash withdrawal for corporate high yield since December and a sharp rise from the $212 million pulled last week.

U.S. Junk Bond Funds Suffer Biggest Outflow Since December

Other measures of the junk bond market, however, remain quite healthy. Year-to-date net inflows stand at about $14 billion as of May 13, a stark reversal from outflows of about $19.6 billion a year ago. And although U.S. junk bond returns for the year dipped below 8% for the first time in five weeks on Wednesday, high yield remains the top performer in fixed income, according to data compiled by Bloomberg.

“Liquidity is much better today than it was heading in to year-end,” Scott Buchta, head of fixed income strategy at Brean Capital, said in an email Thursday.

“I think people are getting a bit more defensive and taking chips off the table,” Buchta said. “We have seen that for the past few weeks as people have looked to take gains and create some dry powder.”

Margaret Patel, portfolio manager at Wells Capital Management, said in an email that high yield is attractive in the fixed-income space because spreads will narrow, allowing for modest capital appreciation.

Junk bond issuers have also continued to access the primary market through macro volatility. Six new deals worth $5 billion are marketing this week, with about $4 billion scheduled to price. Last week Washington-Beijing trade tension dominated the headlines, but high-yield supply totaled $12 billion, making it the busiest week in nearly 20 months.

High-Grade Persists

It’s a similar story for new deal flow in the U.S. investment-grade bond market. The tariff tit-for-tat dampened issuance conditions and kept borrowers sidelined on Monday, but 18 companies have since come forward to raise almost $30 billion of new bonds.

High-grade corporate bond funds also remain on a tear. Inflows of $2.17 billion for the period ended May 15 mark the 16th consecutive week cash has poured in. Investors added $3.3 billion last week. The total influx now stands at $44 billion since the streak began in January.

Other positive measures for investment-grade include return levels and cash spreads, which have managed to stay flat to marginally tighter this week. High grade, like high yield, is among the best performing fixed-income asset classes, currently returning 6.1% to investors, up from 5.67% last week.

Meanwhile, leveraged loan funds saw withdrawals of $560 million, extending the asset class’s losing streak to 26 weeks.

Looking ahead, equity markets volatility will play a big role in the direction of flows. “We already started to see flows stabilize later in the week, so outflows are only likely to be sustained if equities move lower again,” said Bradley Rogoff, global head of credit strategy at Barclays Plc.

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