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Fixed income market softens further on tapering speculation

Senior Credit Analyst

Fixed income market continues to soften on tapering speculation (Part 3 of 4)

(Continued from Part 2)

Positive macroeconomic data continues to drive speculation that stimulus will reduce

The High Yield market (HYG) continues its volatile descent back to reality. The market inched lower towards the end of last week, as yields edged higher given positive expectations about economic recovery.


Volumes back down

As expected after the strong spike in volumes the previous week, volumes last week were depressed. Issuers saw a window of opportunity to tap the market diminish as investors once again raised their guard against the possibility of quantitative easing tapering in September.

Volumes last week were $4.7 billion, versus a value of $8.5 billion the prior week. Only 15 deals priced last week, compared to 19 the prior week.

Fund flows once again in free fall

After slightly negative fund flows the prior week, last week once again opened the floodgates. Investors were eager to cash out of high duration bonds.

Fund flows for the week reached $388 million in outflows—once again reversing the positive inflows from the previous week. Year-to-date flows to mutual funds focused on high yield bonds (JNK) have accumulated $4.3 billion in outflows.

The weak fund flows and diminished volumes may be hinting at continued softness in the high yield (HYG) space—at least until the FOMC meeting. After the meeting, bonds may have a second correction. This correction would be slightly smaller than the one in June, but significant nonetheless. Alternatively, if tapering is delayed, bonds prices may recover some short-lived breathing room.

Read on to see how the leveraged loan market is being dragged down by bonds, yet it offers a better alternative in terms of volatility.

Continue to Part 4

  • Part 1 - Markets down: Quantitative easing tapering could start next month
  • Part 2 - Why corporate bond volumes are down
  • Part 4 - Why fund flows remain resilient