Must know: The weekly high yield bonds and leveraged loans update (Part 6 of 8)
After a sizable increase in the weekly flows in the previous week, many investors asked why the momentum declined in the high yield fund flows. What really changed?
It seems the high yield bond market is reading a lot into the economic indicators, which lowered the investor sentiment in high yield bond market; we saw a decline in the fund flows by more than 45% last week. The sharp drop in the housing market index stood out along with a slowing in the Empire State General Business Conditions Manufacturing index and the Federal Open Member Committee maintained its outlook on monetary policy with the tapering of asset purchases likely to continue. Declining economic indicators lowered the ten-year Treasury yield by 1bp, however, high-yield bond prices continued to gain momentum throughout the week. An increase in interest rates decreases the bond prices and vice versa.
The weekly fund flows declined to $804 million, almost $646 million lower than the previous week’s inflows of $1.4 billion. Fund flows are great indicators to measure investor demand in the bond market. In the past two weeks fund flows consistently broke off into positive territory, but last week was quite volatile. It will be early to give any indication on the high yield bond market as the bond market reacts sharply to the U.S. Treasury rates, which are impacted greatly by the economy. The year-to-date fund flows stood at of $860 million, lower than $1.7 billion over the same period in 2013.
Major high yield bond focused ETFs, iBoxx $ High Yield Corporate Bond Fund (HYG), posted an outflow of $38 million as opposed to the SPDR Barclays Capital High Yield Bond ETF (JNK), which posted $39 million of fund inflows. The one-month fund flows for HYG were a negative $256 million compared to inflows of $88 million for JNK. Unlike high-yield bonds, leverage loan market is seeing continued interest from investors marking 88th week of positive inflows.
Browse this series on Market Realist:
- Part 1 - Last week’s market trends: The effect of macroeconomic indicators
- Part 2 - Must know: Why did the high yield bond market weaken?
- Part 3 - Setback: Why did high yield bond fund flows decline last week?