One week ago, in the aftermath of the junk bond tremors unleashed by Third Avenue (which are only just starting) we reported that there had been a historic revulsion [9]toward fixed income fund flows, with unprecedented withdrawals in virtually every bond class, from Investment Grade, to Junk to bank loans. We quoted Bank of America as follows:
- 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)
But while the pain in junk was well-known, what surprised us was the dramatic outflow from Investment grade bond funds which were hit with a record wave of redemptions, the largest since Lipper began tracking flows in 1992.
[10]
What was also fascinating, was the dramatic outflow from bank loan funds, which as we said previously, was "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."
[11]
Fast forward one week when we get the latest fund flow data courtesy of BofA and it is, again, a doozy.
As BofA's Michael Hartnett summarizes there has been a "continued shunning of fixed income" with over $25 Bn of outflows from bond funds in three weeks, of which $6.4 Bn took place in the past week, resulting in outflows in 6 of past 7 weeks. The fund redemptions were concentrated in corporate credit and EM debt, as expected.
However, the biggest outflow risk is not to Junk - by now everyone is on edge there, and little can surprise investors - it is the continuing outflows from investment grade, that main funding source for trillions in corporate stock buybacks and which, as we have shown before, is the biggest marginal buyer of stocks. According to BofA, it was the IG space that took another beating with largest outflows ($3.5bn) in 17 weeks!
[12]
For those curious, the carnage in bank loan funds is also continuing, with 0.7% of total AUM redeemed in the past week, and outflows taking place in 20 of the past 21 weeks..
Overall, this is the full fixed income outflow breakdown:
- $0.7bn outflows from EM debt funds (outflows in 28 of 31 weeks)
- $2.6bn outflows from HY bond funds (outflows in 6 out of past 7 weeks)
- $3.5bn outflows from IG bond funds (outflows in 5 of past 6 weeks)
- Tiny $38mn of outflows from TIPS (first outflow in 6 weeks)
- Bank loan funds have seen outflows in 20 out of past 21 weeks ($0.8bn)
Just one place saw inflows:Govt/Tsy funds which after outflows in 10 of the past 11 weeks, saw a modest $500mm inflows.
As for equities, there was another $1.5 Bn in outflows from equity funds which probably explains this week's rip higher in equity markets.
