High yield bonds and leveraged loans outlook: Weekly fund flows (Part 3 of 3)
Investor sentiments favored the U.S. equity and high yield bond market
The Vanguard Total Bond Market ETF (BND) has rallied almost 1.5% since the start of the year and was down by 11 bps last week. In line with that, the Power Shares Senior Loan Portfolio (BKLN) ETF, which mainly tracks the leveraged loans, reported an outflow of $17 million. However, investment-grade bonds (LQD) posted net inflows of $3.4 billion last week. High yield ETFs such as JNK and HYG both gained momentum after a huge selloff in the HYG ETF last month.
Bond prices were marginally lower for the BKLN last week due to increase in the ten-year US treasury yields, which were up by 6 bps last week. The S&P/LSTA Leveraged Loan Index, which is the benchmark index for leveraged loans, was down by 0.1%.
In contrast, both the US equity market and the high yield bond market remained favorable. The S&P 500 Index was up by 200 bps possibly because of strong earnings released last week. All equity funds reported net inflows of $3.4 billion, with $1.7 billion inflows in each domestic equity funds and non-domestic equity funds. The SPDR S&P 500 ETF Trust (SPY), which replicates the performance of S&P 500 Index, saw an inflow of $181 million last week. High yield bonds also outperformed. Investors poured $8 million and $37 million in HYG and JNK ETFs respectively last week.
High yield bond prices for both HYG and JNK were up by 1%, while the benchmark index, Bank of America Merrill Lynch US High Yield Master II Effective Yield was down by 10 bps. Bond’s price and yields are inversely related, so when bond price goes up, yield goes down and vice versa. Junk-treasury spread (JTS) compressed by 13 bps. Spread is the risk premium an investor expects on the riskier investments over a risk free asset.
In addition, continued selloff in emerging markets are driving bond inflows in the US despite the Fed’s tapering. Investors remained worried about the weakening currencies across emerging market and slow growth. China released its Producer Price Index last week, which showed a decline of 1.6%, in line with the analyst consensus. Emerging Markets Equity funds reported net outflows of $262 million, while the iShares MSCI Emerging Markets fund (EEM), which seeks to track the investment results of the MSCI Emerging Markets Index posted an 89 million selloff.
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