Why investors piled into junk bond funds

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Nov. 20 2020, Updated 4:14 p.m. ET

High-yield debt markets see higher volatility

High-yield bond (HYG), or junk bond (JNK), prices are usually very sensitive to economic cycles and market risk perceptions. An economic upturn usually benefits firms’ revenues and profits. Currently, lower-rated borrowers have less difficulty paying off their debt obligations. As a result, delinquency rates decline.

The reverse is also true. High market volatility usually increases risk perceptions for junk bonds (PHB). This increases spreads and yields. As a result, bond prices decrease.

IMF warns of slower global growth

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On Tuesday, the International Monetary Fund (or IMF) released its updated World Economic Outlook. The IMF decreased its world economic growth rates for 2014 and 2015. It decreased them by 0.1% and 0.2%. The new growth rates are 3.3% and 3.8%, respectively. The last version of the report was released in July 2014.

Repercussions of slowing world economy

The minutes for the Fed’s September Federal Open Market Committee (of FOMC) meeting were released on October 8. The minutes mentioned that policymakers were worried about slower global growth impacting the U.S. economy. They were also concerned about the appreciating U.S. dollar. This would affect the net exports component of the gross domestic product (or GDP). It would affect economic growth in the U.S. You can read a detailed analysis of the minutes in “Must-know: Updates from the Fed’s September FOMC minutes.”

These factors decreased junk-bond prices. The prices of exchange-traded funds (or ETFs) tracking major stock market indices—like the PowerShares (QQQ) and the iShares Core S&P 500 ETF (IVV)—were down by 3% and 3.8%, respectively, over the week ending October 10. This was a result of the forecast for slowing global growth.

For more on the Fed’s take on credit conditions in the U.S. economy, read “Why the FOMC believes that credit conditions are still strong.”

Secondary market investor flows in junk-bond funds

Investor flows into junk-bond mutual funds came in at $1.3 billion in the week ending October 10. In comparison, an outflow of $2.3 billion was recorded in the previous week. Including last week’s flows, net flows for high-yield bond funds are down by ~$5 billion in 2014 year-to-date (or YTD).

Bill Gross’ exit from PIMCO 

Although market sentiment for high-yield debt was negative last week, investor flows were positive. Bill Gross’ resignation from Pacific Investment Management Co. (or PIMCO) on September 26, had a massive impact on U.S. bond markets. Gross co-founded PIMCO in the 1970s. He has been a market-moving figure for decades.

Investment-grade bond funds see record inflows

Gross’ departure caused many investors to exit PIMCO-sponsored bond funds. This benefited rival bond ETFs. Investment-grade bond funds have benefited. Last week, a record of $6.9 billion found its way into investment-grade bond mutual funds. This is the highest weekly net inflow ever. You can read about it in our weekly investment-grade bonds update.

The next three parts in this series, we’ll discuss primary market activity in leveraged loans.

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