U.S. Markets closed

Investors flee high yield bonds ahead of FOMC meeting

Senior Credit Analyst

Fixed income weekly dose of realism, August 19–23 (Part 5 of 5)

(Continued from Part 4)

In anticipation of a formal announcement to the start of quantitative easing tapering, investors withdrew over $2 billion from high yield funds

Mutual fund flows for last week posted a steep outflow of $2.3 billion in a week when no new issuers came to market. The release of the minutes of the last FOMC (Federal Open Market Committee) meeting once again awakened investor aversion towards high-duration assets. This was the third outflow in four weeks and the largest since June 26.

High Yield Bond Market vs S&P500 2013-08-28

Total fund flows for the year have now accumulated $6.6 billion in outflows. Despite the outflows and the mute volume, the HY CDX20 index, as well known high yield bond benchmark, was up for the week. Nonetheless, limited trading as well as a rebound in Treasuries last Friday due to poor housing data were the driver for the positive numbers at the close of the week.

The previous week’s close to $400 million had left the market, and the spike in outflows last week confirms that investor dislike high yield bonds. With the September FOMC meeting just around the corner, it’s likely that investors will continue to avoid high yield bonds (JNK) until a clear action by the Fed sparks a new interest rate correction. No one wants to be holding the hot potato when interest rates spike up, decimating bond prices in the process.

Browse this series on Market Realist: