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Outlook: Why the high-risk bond market is losing ground

Chanderlekha Nayar

Weekly fund flows: High yield bonds versus leveraged loans (Part 3 of 3)

(Continued from Part 2)

Declining trend

High yield bonds marked another week with huge outflows—and leveraged loans didn’t do any better. Leveraged loans fund flows, though positive, declined at a rate of 50% last week. The year started slow and then picked up momentum in mid-January. Bond prices were in line with demand but not in one direction. The overall market offered mixed reviews on high yield bond and leveraged loan demand until we saw a consistent decline in fund flows over the last two weeks, as investors fled to safety.

Fund flows indicate investor demand, which in turn is a key determinant for bond price volatility. As bond prices go up, the interest rate declines, or vice versa. The ten-year U.S. Treasury yield was down since the beginning of the year, but it ended last week higher by 150 basis points as the Fed’s next tapering of its asset purchases approaches. As per the FOMC meeting on January 27 and 28, 2014, the Fed expects to taper another $10 billion this month, which will reduce asset purchases to $65 billion a month. Investors expect the Fed’s tapering to result in increases in the long-term interest rate, which in turn might hurt high yield bond spreads.

To learn more about high yield bonds and the FOMC, see the Market Realist series Key highlights: Upcoming releases that will affect US debt.

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