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Markets Brace For More Fund Liquidations As Record Outflows Slam Debt Funds

Tyler Durden's picture




 

Among the fixed income community, this week's most important number, more so than the pre-telegraphed 25 bps increase in the Fed's interest rate, was the weekly report of capital flows in and out of bond funds by Lipper/EPFR, which came out moments ago and which following last week's junk bond fund fireworks involving Third Avenue and several other gating or liquidating funds, was expected to be a doozy.

It did not disappoint: in the words of Bank of America, there was  "Carnage in Fixed Income" as a result of the largest outflows from bond funds since Jun’13 ($13bn) with outflows concentraing, as expected, in illiquid & low-quality assets.

The details showed a broad revulsion to all aspects of the fixed income space, from Investment Grade, to Junk to bank loans. To quote Bank of America:

  • Huge $5.3bn outflows from HY bond funds (largest in 12 months)
  •  $3.3bn outflows from IG bond funds (outflows in 4 of past 5 weeks) (2nd biggest in 2 years)
  • $2.2bn outflows from EM debt funds (largest in 15 weeks) (outflows in 20 of 21 weeks)
  • Huge $1.8bn outflows from bank loan funds (largest in 12 months) (outflows in 19 of past 20 weeks)

Bloomberg, which cited BofA numbers, and yet which had different totals was nonetheless close enough. It reported that investors "pulled $3.81 billion from U.S. high-yield bond funds in the past week, the biggest withdrawal since August 2014, according to Lipper."

The FT's numbers were even more different:

Investment grade bond funds in the US have been hit with a record wave of redemptions, a week after two high-yield funds announced they would shutter and another barred withdrawals as the credit market showed further cracks.

 

Investors withdrew $5.1bn from US mutual funds and exchange traded funds purchasing investment grade bonds — those rated triple B minus or higher by one of the major rating agencies — in the latest week, according to fund flows tracked by Lipper.

 

The figures, the largest since Lipper began tracking flows in 1992, accompanied another week of $3bn-plus withdrawals from junk bond funds.

Whatever the real number, the result is clear: investors have launched a feedback loop where lower bond prices lead to more redemptions which force more selling, leading to more redemptions and so on.

As Bloomberg reminds us, the average yield on junk bonds jumped to more than 9 percent on Dec. 14 for the first time since 2011, according to Bank of America Merrill Lynch indexes. And yet despite endless laments that there is "not enough yield", investors couldn't get out fast enough. It appears investors aren't "starved for yield"... they are simply "starved for safety in numbers."

"The negative headline feeds upon itself," Ricky Liu, a money manager at HSBC Global Asset Management told Bloomberg. "And if you are in a poorly performing retail fund, there is also the concern that there could be more pain to follow. The commodities space is still a pretty big part of high yield and there is no relief there yet."

The visual breakdown: junk bonds.

 

Bad news for buybacks: Investment Grade outflows soared in the last week to the highest in over a year driven entirely by redemptions from mutual funds, and offset by a small injection in IG ETFs.

 

Total fixed income fund flows.

But the one category that was certainly the most interesting, is the one we highlighted earlier today when we said "the one asset class that has so far slipped through the cracks, but which will be very closely scrutinized in the coming weeks now that rates are rising: leveraged loans." The reason: the underperformance in leveraged loans so far this year is on par if not worse than that of junk bonds.

 

Result: bank loan funds just recorded their 2nd biggest outflow since August 2011.

And longer term.

 

The bottom line: as new investor liquidity evaporates and as billions are redeemed first from the junk bond universe, then investment grade and then loans, the debt crisis which was unleashed in anticipation of the Fed's rate hike, is about to get much worse, and lead to even more prominent hedge fund "gates" and liquidations, while in the equity space, the lack of Investment Grade dry powder means that buybacks are about to grind to a halt.

 

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Thu, 12/17/2015 - 22:37 | 6937997 bobert727
bobert727's picture

Transitory

Thu, 12/17/2015 - 23:01 | 6938068 Soul Glow
Soul Glow's picture

Absolutely.  The Fed and all other central banks were likely the largest owners of junk debt during the last 7 years and this iswhat they sold first, front running their rate hike.  

Thu, 12/17/2015 - 23:02 | 6938074 NoDebt
NoDebt's picture

I'm starting to smell something that begins with the letter C.  

 

 

Contagion.  What did you think I meant?

Thu, 12/17/2015 - 23:10 | 6938079 Soul Glow
Soul Glow's picture

Janet Yellen's cock.  She has a nasty case of syphilis.

Fri, 12/18/2015 - 06:42 | 6938458 Arnold
Arnold's picture

Perhaps an Executive Order to make all Exit doors wider would help.

Fri, 12/18/2015 - 04:17 | 6938391 Dapper Dan
Dapper Dan's picture

"Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take away from them the power to create money and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money." (Said to be from an informal talk at the University of Texas in the 1920s, but as yet unverified.)

Josiah Stamp quote

https://en.wikipedia.org/wiki/Josiah_Stamp,_1st_Baron_Stamp

Thu, 12/17/2015 - 22:37 | 6937999 CHoward
CHoward's picture

Me thinks there are way too many drama queens.

Thu, 12/17/2015 - 23:02 | 6938071 GRDguy
GRDguy's picture

So if I understand current "free" markets, FANGs and stocks should be going up on all this "bad" news.

Fri, 12/18/2015 - 06:45 | 6938460 Arnold
Arnold's picture

I'm thinking that many managers will at least fitfully sleep over the holidays on whatever stack of cash they can gather now.

Thu, 12/17/2015 - 22:44 | 6938003 Soul Glow
Soul Glow's picture

Who wants junk grade in this environment when the Fed is going to be selling $100B worth of securities every night?  Every night for the next two weeks!  Moreover, who can afford junk grade in this environment?

The consumer is tapped out.  Boomers have retired and locked in their 401ks/pensions.  Millenials don't have enough earning power in this stagflationary environment to purchase a large enough amount of assets to make a difference, CEOs can't buy enough Warhols, and the world's economy contnues to flounder in what history will look back at as the Greatest Depression.

Since the Fed was litterally the buyer of last resort now there is no buyer.  The system is done.

Stick a fork in it and buy physical assets, like silver, while you have the chance.

Thu, 12/17/2015 - 23:01 | 6938069 City_Of_Champyinz
City_Of_Champyinz's picture

I must admit I had no idea what a 'leveraged loan' meant until I looked it up.  Silly me, its a junk bond in 'loan' form that is sold to 'other investors'...Where have I heard that bullshit before?

Thu, 12/17/2015 - 23:05 | 6938082 Soul Glow
Soul Glow's picture

Rehypothication.  Tricks are for bankers.

Thu, 12/17/2015 - 23:08 | 6938090 GRDguy
GRDguy's picture

In simple terms, it is a paper promise, based on a paper promise, that someone promised to keep their promise.

Thu, 12/17/2015 - 23:19 | 6938103 Handful of Dust
Handful of Dust's picture

I too am trying to "leverage" my loans and debt by selling it to someone else.

 

I've heard a rumor, 'never give a scuker an even break.'

 

Fri, 12/18/2015 - 06:47 | 6938464 Arnold
Arnold's picture

Coffee is for closers.

Good Job.

Fri, 12/18/2015 - 00:13 | 6938188 PC Load Letter
PC Load Letter's picture

GRD - Perfect explanation

Fri, 12/18/2015 - 02:31 | 6938322 Booked
Booked's picture

When I read what a leveraged loan was, all I could ask: "What could possibly go wrong?"

 

Fri, 12/18/2015 - 01:49 | 6938282 forwardho
forwardho's picture

Excellent analysis and advice.
Though you may find being a modern day Cassandra disheartening.

Thu, 12/17/2015 - 22:39 | 6938005 Bay of Pigs
Bay of Pigs's picture

I miss the deer in headlights...

Thu, 12/17/2015 - 22:40 | 6938010 Soul Glow
Soul Glow's picture

You know, Janet Yellen reminds me of that deer.

Thu, 12/17/2015 - 22:40 | 6938012 kliguy38
kliguy38's picture

Me too....but give it time

Thu, 12/17/2015 - 23:23 | 6938106 joego1
joego1's picture

Need one of these for the deer-

http://www.highwayproducts.com/_assets/_images/_products/trucks-semi/sem...

Xmas in keensiland

Thu, 12/17/2015 - 22:42 | 6938018 Celotex
Celotex's picture

Okay, I'm going to cancel my buy order for a CA municipal tax free bond fund.

Thu, 12/17/2015 - 22:45 | 6938022 PlayMoney
PlayMoney's picture

We need an over/under on when Mr Yellen cuts back to zero. March?

Thu, 12/17/2015 - 22:54 | 6938048 Jack Burton
Jack Burton's picture

.25 after years and years of zirp? All hell breaks loose!

More proof of the fruad, fakery and downright lies that have made up the manipulated corrupt markets.

We all know you can't go above zirp or the shit storm breaks.

Fri, 12/18/2015 - 06:27 | 6938453 A82EBA
A82EBA's picture

and if the shitstorm does not break by the end of the year is it fair to say theres more to the big picture than we're seeing? at some point we gotta be honest with ourselves cause were gettin punked and bitchslapped since 2009.

Thu, 12/17/2015 - 22:56 | 6938051 tarabel
tarabel's picture

 

 

Okay, who honestly believes that a B- bond is "investment grade"?

The only thing you're investing in is your broker's 401k.

Thu, 12/17/2015 - 23:49 | 6938155 Francis Marx
Francis Marx's picture

https://en.wikipedia.org/wiki/Bond_credit_rating#Credit_rating_tiers

BBB's to BB's are like basiclly going from a chinese buffet to a Mcdonalds

Thu, 12/17/2015 - 23:03 | 6938075 buzzsaw99
buzzsaw99's picture

Why don't you knock it off with them negative waves? Why don't you dig how beautiful it is out here? Why don't you say something righteous and hopeful for a change? [/oddball, kelly's heroes]

Fri, 12/18/2015 - 06:03 | 6938441 cossack55
cossack55's picture

On my list of Top 5 Movies of All Time.  Rickles best role ever.

Thu, 12/17/2015 - 23:24 | 6938110 joego1
joego1's picture

Why do you think they call it junk?

Fri, 12/18/2015 - 00:16 | 6938190 hedgiex
hedgiex's picture

Amazing confidence in the EM Bonds (still low drawdowns). Outside of China (too complex for debates), the lootings by the Crony Capitalists have just begun. Follow this trail for the juices (morality aside).

Fri, 12/18/2015 - 00:26 | 6938197 Make_Mine_A_Double
Make_Mine_A_Double's picture

I am a mere layman with these type of instruments.

But this drain of liquidity seems to correspond with oil crashing into the nether regions.

I've suspected some people somewhere have to be taking it hard in the caboose - and have to liquidate to cover.

Anything to this line of thinking????

Fri, 12/18/2015 - 01:36 | 6938265 forwardho
forwardho's picture

1st rule...
Correlation does not equal causation.
Everything is connected,so hard to chicken and egg this cluster farce.
That being said, energy use is one of those pesky reality indicators.
Demand has dropped for energy across the board. If industry is not making as many goods of value. Not only are they using less energy, The workers who no longer work cannot afford the energy.
The world economy is now trapped in an ugly negative feedback loop.
The worst consequence being the idling of the worlds labor force.
Lest you forget, even if they are no longer productive....
They still need to eat.

Fri, 12/18/2015 - 06:05 | 6938442 cossack55
cossack55's picture

In that case, US unemployment will soon be 0%.  Whoopee!!!

Mon, 12/21/2015 - 11:26 | 6938563 headhunt
headhunt's picture

Imagine if 25 million illegals who are employed in America were to leave.

Fri, 12/18/2015 - 02:12 | 6938311 zipit
zipit's picture

Capitulation?

Fri, 12/18/2015 - 02:28 | 6938318 Manipuflation
Manipuflation's picture

If you want to play the PM game now is a time to be looking at it.  You can get burned so don't say I didn't warn you.  All that I can say is that I bought all of the PM's I could find today.  Was that a good idea?  Maybe it was and wasn't.  You need guts to play in the PM markets.  It is a ruthless business and not for "long term financial product investors".  I am here to play.  "Would you like to play a game?"  

I look for financial blood.  I want to rip your bankster financial throats out.  Make no mistake about me.  I happen to know that there are a lot of folks out there who are stacking as well.  We have money and we have guns.  How about that then?  

 

Fri, 12/18/2015 - 06:36 | 6938443 cossack55
cossack55's picture

Agree, tho I hedge with PCGS/NGC graded numismatic coins.  That is what I call diversifying.

Fri, 12/18/2015 - 07:12 | 6938479 herkomilchen
herkomilchen's picture

For every dollar flowing out of a bond fund there is another dollar flowing into the underlying.  For every seller, there is a buyer.  These numbers are just bond market churn.  So what.

The drop in bond price reflects the real "outflow," defined as the reduction in the number of dollars bidding up bond prices.

Fri, 12/18/2015 - 08:54 | 6938603 BinAround
BinAround's picture

In fact, global oil consumption continues to increase: now 95.3mln bbl/day vs 93.2mln yoy.  Total non farm employment in the USA is growing, now 143mln vs 140mln yoy. US consumers are spending, notice auto sales?  YOY spend on eating out is about 6%.  Consumer balance sheets in the USA have not been this good for decades.  The rate of credit losses for credit cards and mortgages continues to be extremely low.  The rate of growth in consumer credit is very low, no credit bubble with consumers. Admittedly auto lending is strong, but credit losses very low.  Student lending is nuts, but that's just another way for the US gvmt to spend money.  There is stress in energy and commodities after China's orgy of credit fueled mal-investment, but that is like a price cut to US consumers.  Overall, the US economy, which is 70% consumer, is doing ok.  It is entirely possible that we have a good stock market in 2016.   Thanks to all the intelligent comments on this website.  May the force be with you.

Fri, 12/18/2015 - 08:56 | 6938604 BinAround
BinAround's picture

duplicate

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