Two days ago, Credit Suisse reported something which had been rather visible in the markets: an onslaught of retail buying had entered the junk bond market in which institutions were delighted to sell to retail bagholders, in the process repricing the entire HY space if only briefly.
Overnight, fund flow tracking service EPFR confirmed this when it reported that US high yield funds recognized a $5.27bn (+2.8%) inflow for the week ended March 2nd, the largest ever in terms of $AUM and the 2nd largest on a percentage basis.
As BofA notes, even more impressive is that the $2.37bn (+7.13%) net inflow for ETFs was the largest ever for the sub-asset class while the +$2.90bn (+1.87%) for open-end funds was the 3rd largest on record.
Some more observations:
US HY has been starved of inflows since July of last year as investors waited for better entry points into the asset class. And as we have seen volatility subside, economic indicators turn more positive, spreads tighten 156bps, and oil rally nearly 20% in the past 3 weeks, retail has piled into high yield in what amounts to be the 2nd consecutive $2bn+ weekly inflow. However, we would fade the rally we have seen of-late as the fundamental backdrop has not changed meaningfully. In fact, we continue to see signs that we are nearing the end of the credit cycle with the default rate now at 4.2%, 2 consecutive periods of banks tightening lending standards, downgrades outpacing upgrades by a ratio of 6:1, and a general unwillingness to fund CCC borrowers. Regardless, this week’s inflow is undoubtedly a strong technical for the market and we would not be surprised to see the near-term rally continue for several more weeks.
Other risk assets benefited from inflows as well last week, though to a lesser extent than high yield. Equities returned to inflows for the first time in 9 weeks ($622mn, +0.01%), non-US high yield gained $569mn (+0.2%), high grade added $1.27bn (+0.1%), and EM debt saw $480mn (+0.2%). The only asset class we track recording an outflow last week was loans (-$282mn, -0.35%), but even there the bleeding slowed as it was the smallest outflow in 14 weeks. As a whole, fixed income asset classes saw net inflows of $5.78bn (+0.3%).
So is this the “all clear” signal in fixed income? Hardly. If anything this is merely a stampede into risk as the vicious short squeeze in oil has gotten the animal spirits stirred for at least the present time.
Meanwhile, the flows into IG were nominal…
… while loan funds continued to bleed capital.
Finally, for an explanation why the junk bond market is set for another repricing lower, please see our post form last night “How This Default Cycle Is Different: Record Low Recovery Rates” – this is not news now; it will be news in a few months.
via Zero Hedge http://ift.tt/1SnBoOe Tyler Durden