High Yield Mutual Funds See Third Biggest Outflow In History

After the event(s) of last week, risk is off, at least as indicated by capital flows. We demonstrated earlier how domestic equity funds saw a massive outflow even before the May 6th crash. Now, courtesy of Lipper/AMG we discover that the panic gripping high beta assets, specifically High Yield bonds, since the crash was the third biggest in recorded history (going back to 1992). The $1.7 billion in HY mutual outflows is the biggest flight to safety (or in this case money markets) since May 2004.

Some more details on this historic capital outflow from Bank of America. Of course, the firm whose existence depends on the continuation of America's Farcist regime (thank you Marla), will have only good thing to say about this massive withdrawal of dumb liquidity.

Another interesting point comes from the fact that HY ETFs experienced $331mn in outflows for the week, which comes down to 3.3% of their assets. The rest – came out of regular open-end mutual funds – but it only stood for 1.5% of assets in that category. The disconnect between the two indicates to us that it was mostly hot money shorting the market that were responsible for ETF withdrawals, as opposed to the mainstream long-term HY investor base. Otherwise, the distribution between the two segments should not differ much, just as it usually relates over most other intervals. This, in turn, gives us one more reason to believe that such outflows could be temporary, again with a caveat that European sovereign risks continue to subside. In Figure 1 below we show that HY flows, even large ones, have rarely signaled turnaround in HY market spreads. The chart shows that many $1bn+ outflows came at the times when HY spread remained on the tightening trend or were relatively stable longer-term.

And where did all this "risk off" money go? Why Money Market funds, of course. The pillaged repository of presumably worthless cash, saw an inflow of over $16 billion last week. Yet even with that datapoint, Bernanke's and Volcker's plan to kill Money Markets is still succeeding: so far in 2010, money market have seen a ridiculous $383 billion in outflows as mom and pops and have been dumb enough to follow Cramer's recommendations and dump their deflationary cash into stocks. Oops.


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