High yield bonds and leveraged loans outlook: Weekly fund flows

High yield bonds and leveraged loans outlook: Weekly fund flows (Part 1 of 3)

Demand shocks: Why high yield bond funds flows moved up

With two weeks of consecutive outflows, why did high yield bond market rebound? Is that an indication on change in investor appetite?

Weekly fund flows are a great momentum indicator that can signal changes in investor sentiment. Just two weeks ago, investors in the high yield bond market (HYG) were very skeptical about the high yield bond resistance in the midst of rising interest rate environment. Generally, interest rates are inversely proportional to the price of the bond; when rates decrease, the price of the bond goes up and vice versa. However, last week, despite the increase in the U.S. ten-year Treasury yields, high yield bond prices increased.

HY Fund Flows_Feb 14, 2014Enlarge GraphThe weekly fund flows increased to $1.4 billion in contrast to a sizable outflow of $972 million the previous week.

Last week posted the largest fund inflows since the beginning of 2014 and second highest from the level seen in October 2013. The year-to-date fund flows stood at just $56 million, $216 million lower than fund flows seen over the same period in 2013. In a nutshell, the single week inflow reversed the trend in the high yield bond market which posted a cumulative outflow of $1.4 billion previous week.

In contrast to the week ended February 7, 2014, last week’s high yield bond focused ETFs such as iBoxx $ High Yield Corporate Bond Fund (HYG) and SPDR Barclays Capital High Yield Bond ETF (JNK) posted a weekly inflows of $8 million and $37 million, respectively. Both the ETFs represent 95% of the high yield bond universe. The one-month fund flows for HYG was negative $260 million and inflows of $22 million for JNK.

While the momentum just picked up in high yield bond market, leverage loans (BKLN) seem to have become more customary to the positive inflows. Investors remained bullish about leveraged loan market for the 87th week straight.

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