May 17, 2019

High Yield Funds Follow the Equity Markets Down

by Pat Keon, CFA.

From a fund flows perspective, the high-yield funds peer group got off to a rousing start in 2019. The group recorded net positive flows in 13 of the first 15 weeks; they recorded their largest quarterly net inflows (+$12.0 billion) since the third quarter of 2012; and the positive investor sentiment continued into the start of Q2 (net inflow of +$2.6 billion for the month). Since the tail-end of April, though, high yield funds have experienced a change in demand as they have suffered net outflows in three of the last four weeks. This downturn includes net negative flows of $2.6 billion for the most current fund-flows trading week (ended May 15)—the group’s worst weekly flows result since late December 2018.

The fund flow results for the high-yield funds peer group we’ve seen this year are tied directly to the direction of the equity markets. High-yield debt securities (due to their risk profile) correlate more with common stocks than they do with taxable fixed income securities. When high yield funds were prospering in Q1, the equity markets were recording double-digit gains as the NASDAQ Composite, S&P 500 Index, and Dow Jones Industrial Average were up 16.5%, 13.1%, and 11.2%, respectively, for the quarter. Correlating with the new outflows we’ve seen for the peer group since the end of April, all three of these indices are down more than 2% during the same time period. The equity markets have been negatively impacted over the last two weeks by the escalation in the U.S/China trade war.

Mutual funds were responsible for the majority of the net outflows (-$1.9 billion) for high yield funds this week. The largest contributors to the net negative flows were BlackRock High Yield Bond Portfolio (-$623 million), AB High Income Fund (-$223 million), and PGIM High Yield Fund (-$167 million). On the ETF side of the equation, the largest individual net outflows belonged to iShares iBoxx $ High Yield Corporate ETF (HYG, -$472 million) and SPDR Bloomberg Barclays High Yield Bond ETF (JNK, -$428 million).


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