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High yield fund flows continue bounce between inflows and outflows

US High Yield Bond Fund Flows 2013-03-25Enlarge Graph

Once again, last weeks fund flows switched direction, posting a modest positive inflow.

Fund flows are good proxy metrics to gauge investors demand or interest in an asset class. Weekly fund flows published by EPFR or Lipper can help investors identify momentum trends and changes in interest by investors. Given the lag between the time cash is injected into the fund and the investment of the cash into the relevant asset class, they can serve as leading indicators to anticipate price movement.

Last week was a strong week in terms of demand, as measured by the record new issue volume. Supply, on the other hand, was modest and posted only $200 million in inflows, which was half the amount of outflows of the previous week. With the latest inflow, the year-to-date total still remains at a positive $482 million.

Despite the weak supply indicated by fund flows, several issuers upsized their offerings given the strong market reception. This may be the result of significant cash already sitting in the funds, which fund managers likely want to invest before the end of the first quarter to avoid showing a large cash balance in their quarterly reports.

The dwindling demand for high yield bonds continues to be of concern to ETF bond investors (e.g. JNK, HYG). In the short term, it is uncertain what direction the market may go, but what is certain is that in the medium to long term yields will increase and depress bond prices as the economy recovers. The data today by the Federal Reserve Bank of Chicago showed an improved Activity Index, which confirms that recovery is underway.