Why are high yield volumes strong despite fund outflows? (Part 6)

Market Realist

Continued from Part 5

Cause for concern?

With the issuance volumes across the high yield bond market and the leveraged loan market, the market seems like it should be back on a healthy note. On the other hand, the strong outflows in the high yield market the previous week are a reason for concern.

(Read more: High yield bonds, the pain continues and will only get worse)

August is upon us

August is generally a slow month within the fixed income markets (BND). Most of the dealmakers go to their summer houses and try to forget about the market for a month.

Additionally, investors are now fully aware that tapering may begin in September. To complicate matters, talks of the fiscal cliff are emerging again, and there’s no definite candidate either to replace Fed Chairman Ben Bernanke. All these factors are negative for the bond market.

Investor reaction will start to price in more risk into high yield bonds (JNK) as the date approaches, and once someone sells, the herd mentality may unleash another sell-off. Though in the case of another sell-off, any bounce-back is much less likely this time.

(Read more: Why MLPs provide excellent risk-reward for investors)

Where to hide

The leveraged loan market (BKLN) may be a better option for those wanting to park cash somewhere. It won’t offer outstanding returns, and it may be dragged down slightly in the case of a bond sell-off due to several reasons outlined here. But overall, it’s a low volatility place with good fundamentals for medium- to long-term investors.

(Read more: Why leveraged loans have followed high yield bonds (Part 1))

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