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 [13]. 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 [14]:
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.
[15]
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.
[16]
Total fixed income fund flows.
[17]
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.
[18]
Result: bank loan funds just recorded their 2nd biggest outflow since August 2011.
And longer term.
[19]
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.
