High-Yield Bond Funds Smashed With Record $7.1 Billion Outflows

Tyler Durden's picture


High-Yield bonds funds saw record outflows of $7.1 billion this week - the fourth week running - as the slow-motion train crash in credit starts to accelerate.


As Forbes reports, the huge redemption blows out past the prior record outflow of $4.63 billion in June 2013. The full-year reading is now deeply in the red, at $5.9 billion, with 43% of the withdrawal tied to ETFs.

Simply put, everyone in the bond market knew 'not' to sell because liquidity is simply not there; but game theory's first mover advantage finally broke as retail investors run and create a vicious cycle of 'liquid' ETF selling forcing 'illiquid' underlying bond selling... just as we warned here and here.

Why should equity investors care? See chart below...

Bond managers are reaching desperately for protection in the CDS market - which is now at 6-month wides - but in the end are forced to liquidate holdings as ETF flows dominate...


You were warned:

High-Yield Bonds "Extremely Overvalued" For Longest Period Ever


High Yield Credit Market Flashing Red As Outflows Surge


Is This The Chart That Has High-Yield Investors Running For The Hills?

*  *  *

Between a sudden shift to a preference for "strong" balance sheet companies over "weak" balance sheet companies (the end of the dash for trash trade), and this rotation from high-yield to investment-grade, it is clear that investors are positioning defensively up-in-quality ending the constant reach-for-yield trade of the last 5 years.

Why should 'equity' investors care? The last few years' gains in stocks have been thanks massively to record amounts of buybacks (juicing EPS and also providing a non-economic bid to the market no matter what happens). This financial engineering - for even the worst of the worst credit -  has been enabled by massive inflows into high-yield and leveraged loan funds, lowering funding costs and allowing CFOs to destroy/releverage their firms all in the goal of raising the share price.

Simply put - equity prices cannot rally for long without the support of high-yield credit markets - never have, never will - as they are both 'arbitrageable' bets on the same capital structure. There can be a divergence at the end of a cycle as managers get over their skis with leverage and the high yield credit market decides it has had enough risk-taking... but it only ends with equity and credit weakening together. That is the credit cycle... it cycles.

* *  *

Finally, as we concluded previously, there is little that the dealers can do if the selling continues as 'any' credit risk positions are unwound. The problem is that the Fed's dominance of the market and unintended consequences of controlling the repo/shadow-banking system have left bond markets more fragile than they have ever been.


*  *  *

We await the Fed's decision on applying money market "gate" rules to high yield funds... it's for your own good!!

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Thu, 08/07/2014 - 17:33 | 5061254 Recognizer
Recognizer's picture


Thu, 08/07/2014 - 17:35 | 5061261 VATICANT
VATICANT's picture

This crash is going to be awesome!!

Thu, 08/07/2014 - 17:35 | 5061264 VATICANT
VATICANT's picture

More awesome if Israel would go into non-existence

Thu, 08/07/2014 - 17:36 | 5061271 NotApplicable
NotApplicable's picture

Nation-states have never existed, except but in the mind.

Thu, 08/07/2014 - 17:38 | 5061276 VATICANT
VATICANT's picture

So can I just refer to them as the bastard-state?

Thu, 08/07/2014 - 17:45 | 5061316 Pladizow
Pladizow's picture

Can I refer to the Vatican as a pedophile state?

If so, Which is worse?

Thu, 08/07/2014 - 17:53 | 5061347 oudinot
oudinot's picture

And the United States as the Retard State

Thu, 08/07/2014 - 18:32 | 5061510 VATICANT
VATICANT's picture

Absolutely on both accounts. Of course emphasis on the Vatican being the pedophiles, not to mention blood suckers

Thu, 08/07/2014 - 17:55 | 5061356 cossack55
cossack55's picture


Thu, 08/07/2014 - 17:44 | 5061305 Stoploss
Thu, 08/07/2014 - 17:35 | 5061267 NotApplicable
NotApplicable's picture

It's those fifty year bonds crowding out the market, isn't it?

Thu, 08/07/2014 - 17:41 | 5061294 Winston Churchill
Winston Churchill's picture

Just wait until your Myra bonds become perpetuals.

On a long enough timeline ,they will never be redeemed.

Thu, 08/07/2014 - 17:44 | 5061304 Pladizow
Pladizow's picture

Yet SJB, the high yield short ETF is right around its 52 week low?

Thu, 08/07/2014 - 17:46 | 5061315 Winston Churchill
Winston Churchill's picture

You must be crazy trying to make sense of this 'market'.

Thu, 08/07/2014 - 18:16 | 5061446 eclectic syncretist
eclectic syncretist's picture

Low yield bonds seem OK for the time being, but my vigilance antennae are up and operational.

Thu, 08/07/2014 - 17:46 | 5061322 El Vaquero
El Vaquero's picture



You forgot the crack-up part, but first Yellen needs to have a small taste of deflation.  Pedal to the metal, BITCHEZ!

Thu, 08/07/2014 - 17:42 | 5061297 Keltner Channel Surf
Keltner Channel Surf's picture

Bullard meant high yield in his 'sell bonds' recommendation, joining Yellen's small cap dissing in another Fed victory.  

Up next:  Dudley begins coverage of the Utilities sector with a "Hold" rating.

Thu, 08/07/2014 - 17:46 | 5061313 Rainman
Rainman's picture

sheesh ...to think somebody some time ago said the subprime crisis is contained.

Thu, 08/07/2014 - 17:46 | 5061314 syntaxterror
syntaxterror's picture

Better Call Bernanke!

That mofo could scheme a way outta this. Viva Bernanke!

Thu, 08/07/2014 - 18:11 | 5061427 Cattender
Cattender's picture

Has anyone else Noticed that EVERY Time they switch Fed Heads TSHTF????

Thu, 08/07/2014 - 17:49 | 5061328 Bossman1967
Bossman1967's picture

By friday all will be forgotten and next tuesday record highs.

Thu, 08/07/2014 - 17:52 | 5061345 debtor of last ...
debtor of last resort's picture

Seems we need something bigger to fill the Yellen spread.

Thu, 08/07/2014 - 17:56 | 5061362 Seasmoke
Seasmoke's picture

Try Benankes bald head. 

Thu, 08/07/2014 - 18:04 | 5061403 Not Too Important
Not Too Important's picture

Reminds me of the animals running away from Yellowstone Natl. Park. The supervolcano is about to blow, the scientists and .gov know it and are keeping their mouths shut, but the animals know and they're running like hell. What the animals don't realize is that there is nowhere to run to that Yellowstone blowing won't destroy.

Between Yellowstone, Fukushima and Plum Island/Ft. Detrick, the Georgia Guidestones were off by a solid 500,000,000.

We're going to zero.

Thu, 08/07/2014 - 18:11 | 5061428 Its Only Rock N Roll
Its Only Rock N Roll's picture

soon the Fed will create yet another facility for high yield fund managers and ETF's to sell to...all in the name of saving the system

High Yield Liquidity Auction Facility

HYLAF (pronounced 'high laugh')

one can hear one of those after taking a bong hit too




Thu, 08/07/2014 - 20:12 | 5062130 starman
starman's picture

holy piss! tomorrow should be the run for the doors scenario.

Thu, 08/07/2014 - 21:23 | 5062531 Dr_Lucid
Dr_Lucid's picture

I always thought Bond investors were more rational and less emotional than retail stock investors.  So wait......if this is what the bond guys do to their ETF's what in the world is it going to look like when retail exits THEIR ETF's ? IWM SPY QQQ

This is going to be awesome. Not even going to get sucked into the UVXY uppy down sucker bet either, just going to sit there from the sidelines and watch this all go to hell.

Thu, 08/07/2014 - 22:23 | 5062902 NIETSNEREM
NIETSNEREM's picture

So when the SHTF and stocks crap out again, how does Obama spin it to be Bush's fault again?

Fri, 08/08/2014 - 06:56 | 5064018 AdvancingTime
AdvancingTime's picture

 It might soon become apparent the economic efficiency of credit is beginning to collapse and the additional money poured into the system coupled with lower rates can no longer drive the economy forward.  When this happens we are at the end game.

At some point the return on loaning money is simply not worth the risk!  Why do you want to loan money if most likely you will never be repaid or repaid with something that is totally worthless? When this happens the only safe place to store wealth will be in "tangible assets" and the only lenders will be those who print the money that nobody wants.

The collapse of credit can pose major problems such as what we saw when many sellers were forced to demand payment up front before shipping goods in 2008. More on this subject below.


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