February 16, 2019

Investors Develop an Appetite for Risk

by Patrick Keon.

High yield funds (including both mutual funds and ETFs) took in $728 million in net new money for the fund-flows trading week ended Wednesday, February 13. This was the fifth net inflow in the last six weeks for the group during which time its total intake has been +$9.4 billion, this includes a net positive flow of +$3.9 billion for the fund-flows week ended February 6, the group’s fourth largest one-week increase on record. As of right now the quarter to date increase represents the largest quarterly net positive flow since Q1 2016 (+$9.5 billion). These net inflows indicate a trend reversal in investor sentiment as prior to this year the high yield funds peer group had suffered eight consecutive quarterly net outflows (its longest such streak in history) to shrink its coffers by just over $68 billion. This change in sentiment was almost immediate as the group experienced a net negative flow of -$20.7 billion in Q4 2018, its second-worst quarterly net outflow ever trailing only the -$24.9 billion during the third quarter of 2014.

High yield bonds correlate more with stocks than they do with other taxable fixed income. This is because high yield bonds (or junk bonds) are substantially more risky than other debt (such as investment-grade debt and U.S. Treasuries) and therefore trade more similarly to equities (which are even more risky). After nose-diving in Q4 2018 stocks bounced back in January (the S&P 500 Index posted its best return for January in over three decades) and high yield bond funds have been able to participate in the goodwill.

High yield mutual funds (+$5.7 billion) have taken in the majority of the net inflows this quarter. The two largest net positive flows among mutual funds belong to BlackRock High Yield Bond Portfolio (+$885 million) and PIMCO High Yield Fund (+$611 million). The inflows were more concentrated for high yield ETFs as iShares iBoxx $ High Yield Corporate Bond ETF (HYG, +$1.9 billion) and SPDR Bloomberg Barclays High Yield Bond ETF (JNK, +$1.2 billion) accounted for most of the group’s overall positive net flow of $3.6 billion.





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