"Nightmare On Bond Street": HY Turmoil Leads To Third Largest Junk Outflow In History

Following this month's drop in junk bond prices and the 40 bps spread widening in high yield last week - the largest since November 2016 - Bank of America has come up with an apt title for its weekly fund flow report: "Nightmare on Bond Street"...

... and with good reason: last week, US junk bond funds and ETFs reported a $4.43bn outflow this past week - the third largest outflow on record and the largest since August 2014. This follows a smaller $0.94Bn outflow the prior week. Non-US HY contributed an additional $2.3bn worth of redemptions, bringing the global junk outflow figure to -$6.7bn, also the 3rd largest ever.

The near record outflows accompanied the second most aggressive round of selling in the US junk bond market in 2017. The weakness in performance only trails a sell-off that occurred in March, when spreads widened by 61 points in less than three weeks according to FT.

“It was very much a flows driven sell-off last week and in the beginning of this week,” said Tim Schwarz, a credit analyst with Investec Asset Management. “We saw a lot of . . . pockets of illiquidity.”

According to EPFR, roughly half of the US HY withdrawals came last Friday, when more than $2bn left the space in one day. Since then, the outflows have been slowly declining each day, from $585mn on Monday to $494mn yesterday. Somewhat surprisingly, large outflows such as the most recent bout are not correlated with subsequently weak performance. In fact, out of the 15 largest-ever daily high yield outflows recorded, next 3 month returns have been positive 10 times, with an average annualized return of 7.2%. According to BofA, this is likely because most of the spread widening occurs just before the flood of withdrawals, providing an opportunity to capture excess returns should the selloff prove to be temporary. Indeed, as BofA's credit strategist note, given Thurdsday's strong secondary performance, "we think such is likely to be the case in last week's episode as investors have once again embraced a buy-the-dip mentality."

In contrast, EPFR also reports that flows for other fixed income asset classes were relatively stable. However, the large outflows from high yield and loans resulted in a net $1.32bn outflow from all bond funds and ETFs, after a $2.27bn inflow in the prior week.

Inflows to high grade were little changed at $3.31bn, down from $3.41bn a week earlier. Inflows to short-term fixed income increased (to $0.65bn from $0.27bn) while inflows outside of short-term declined (to $2.66bn from $3.15bn). Inflows were higher for high grade funds (to $1.83bn from $1.52bn), but lower for ETFs (to $1.48bn from $1.89bn). Inflows to global EM bonds weakened to $2.66bn from $3.15bn, mostly driven by local currency funds / ETFs. Inflows to munis instead improved to $0.34bn from $0.28bn. Finally, inflows to money markets were close to flat at $0.02bn, down from a $7.58bn inflow in the prior week.

Speaking to the FT, Robert Cusack, a PM at WhaleRock Point Partners, said that the recent high-yield sell-off could be short lived, likening it to the brief but rapid move higher in credit premiums earlier this year. But Cusack added that he is still looking to reduce exposure to the asset class.

“It’s a topic each week in our investment committee meetings and we have been discussing the risk reward in high yield now,” he said. “Our next move is to reduce our exposure in high yield.”

Meanwhile, there were no problems in equity land: flows to stocks improved to a $3.2 billion inflow, which however once again masked an ongoing divergence, as $9.9bn of this amount went to ETFs. Active, i.e., human managers, saw another outflow, this time for $6.7 billion as the non-ETF financial sector continues to die a slow, painful death.


LawsofPhysics Fri, 11/17/2017 - 09:24 Permalink

So many financial/paper/digital bullshit games, so many paper/digital promises...so relatively few real assets...What is the real value of your labor? If all you do is push paper/digits, not much.Now, jump you fuckers!

Ruger556 Fri, 11/17/2017 - 10:14 Permalink

Ok, I just have to ask.. who sells junk bonds and why would anyone buy them?   I am not a newbie here, but I guess I don't understand these as well as I would like.  Also what is the difference between a corporate bond and junk bond?  And aren't bonds supposed to go up when the stock market goes down?  But now, we seem to have a correlated bond and stock market (which I understand is bec of the fed and all the easy money)..  so besides Gold (PMs) and lead (and bitcoin < which I really don't trust) what other places are there to store wealth.  Not looking for specific investing advice, but getting an overall understanding of what else is out there. If real estate, stocks, bonds and bitcoin are all in bubbles, it only leaves PMs...  

JohnGaltUk Ruger556 Fri, 11/17/2017 - 11:25 Permalink

The bond market is the most bubbly investment out there at the moment, especially sovereign bonds. Soon the market are going to teach western nations a lesson. When one falls this will be like dominos and the CBs plate spinners are going to have broken plates.When sovereign bonds fail this will cause many bank failures because they hold sovereign debt as reserves and they never fail right. Oh ok we will forget about the whole of Europe defaulting in 1931/32.

In reply to by Ruger556

Ruger556 JohnGaltUk Fri, 11/17/2017 - 12:08 Permalink

So country/state bonds are different than corp bonds.. and I am still wondering what a junk bond is..  corp bonds only fail when the company defaults.. of course if a soveriegn fails, they are going to do what Cyprus did, freeze accounts and take money to pay the bond holders.. isn't that what we all believe? 

In reply to by JohnGaltUk

JohnGaltUk Ruger556 Fri, 11/17/2017 - 14:25 Permalink

Junk bonds are called that because of their rating. Some lower Bs are not considered investment quality, so they are junk. Sovereign bonds are treated like gold but really they have just as much risk attached to them as any other corp bond.Venezuala has just entered junk bond status if they were not already before which I think they were. More risk = more yeild = junk.When a bond yeild goes up the value of the bond goes down because of risk. You might buy a $100 dollar bond but the yeild goes up by 5% and then your bond is worth 80 cents on the dollar. This is just an example. A year back or so there was a movement of 1/2% and billions were lost on the bond market, you can lose your shirt very quickly on the bond market.In a financial crisis bonds can easily go to zero, it a piece of paper with a promise. Shares a different, if the company fails, all the assets are sold and shared out against the share holders if there is anything left.Dude we are living in some very strange times. Western governments are broke, dead broke. Historically when the state get in this position they turn on their citizens, Rome did it, Hungary did it a few years ago when they just took everyones private pensions, they did the same in Cypress and they did the same in the USA with the Bank Holiday and told everyone to hand over their gold then devalued. We live in times right now when the state will steal your assets and take your liberty. Have an escape plan.

In reply to by Ruger556

Ruger556 JohnGaltUk Fri, 11/17/2017 - 15:03 Permalink

Yes we are.. very strange, i guess I will still allocate to PM..for now.. because if the SHTF.. it will still be there.. hopefully.. The escape plan, to where.. i mean.. i feel like i am in a good, small community, probably the best place to be right now..  Thanks for the thorough explanation of the bonds, that helps, so junk bonds are corporate or state (state as in not corporate, but a country/state/county/city) bonds which are low quality/rating.  I am guessing Zimbabwe bonds would be junk status.. lol.  

In reply to by JohnGaltUk

CRM114 Ruger556 Fri, 11/17/2017 - 11:54 Permalink

PM markets are completely manipulated by non-physical gold futures. So, there isn't anything that isn't in a bubble. It's that bad.Your money needs to be in reducing future bills, and cash. Move somewhere with low/minimal government. Insulate your house, that kind of thing. Replace stuff that wears out with quality, lifelong products; vehicles, roof shingles. Find stuff the government doesn't tax and can't requisition. Get and stay healthy.

In reply to by Ruger556

Ruger556 CRM114 Fri, 11/17/2017 - 12:05 Permalink

So i have no mortgage, and a metal roof, the extra insulation is a good idea.. and I got food storage and i plant a garden every year.. got some livestock too, and moved out to rural texas.  Still, if I wanted to save for the future, there doesn't seem to be any good financial vehicles.. which is really concening.. I know there will come a time, when I won't be able to move as well as I can now and may need to pay for medical care and food.. I do realize that the PM markets are manipluated by paper gold.. (i mean paper gold, is not gold, it is paper).. I guess I just need to invest in toilet paper companies, we will always need that right?  

In reply to by CRM114

CRM114 Ruger556 Fri, 11/17/2017 - 13:18 Permalink

Sounds like you have things pretty well sorted.You can do as I do, and ensure any renos to your house make it easier/safer to use as you age. If you have the space, some form of accomodation which could in future be rented to a carer in exchange for care might be a good idea. I am converting an outbuilding; it will be used by summer vistors/guests/family in the meantime. People will always need homes - you might want to look at buying/building a local rental house or two. If you think of a good investment, let me know. I can't think of a safe one. Investing in your own education can be valuable. I am able to repair/replace everything on my property myself - well to electrics to roof. I have laid things out so repairs can be done later by my brain + one or two local lads' muscle.

In reply to by Ruger556

Ruger556 CRM114 Fri, 11/17/2017 - 14:56 Permalink

The house we moved into is old age ready, wide hall ways, wide doors, walkin in shower.. and no steps to enter the house either.. we even have a nice patio.. my one complaint would be that there are not enough windows that open, but that can be easily fixed..  I would build something on my property also, but it will drive up my taxes.. so that really sucks.. and right now I enjoy my privacy so I am not sure i want someone else living here.. and I am pretty handy around the house myself.. but I am always learning, lots to do when you have a little farm/ranch..  I have been thinking about rental properties.. maybe that is the way to go.. i just hear so many horror stories that I am reluctant to do that.. I will have to think about it more.. I am not enthused about buying in this market, I think i will hoard now and if/when things drop, maybe get some then.. it sounds about the best plan i can come up with now..  

In reply to by CRM114

Ruger556 CRM114 Fri, 11/17/2017 - 15:34 Permalink

I think i am going to buy some goats.. we get about 5.50 a lb at market for goats between 45-60 lbs.. (when they are small and not tough).. I have sheep now, but the markets isn't as good, I figure if I can sell between 1000 - 2000 lbs of goat a year, it would more than pay for taxes and there won't be too many weeds.. goats like weeds.. get a few head of cattle.. to eat the grass (or keep the sheep <- but higher maintenance) .. just need to get a sustainable herd first.. takes a few years to build.. So that is the only advice I can give you.. not good for city slickers tho.. 

In reply to by CRM114

JohnGaltUk Ruger556 Fri, 11/17/2017 - 17:10 Permalink

Roger I am from the UK but follow the USA closely. From my POV Texas is a very proud and independent state and I believe if any state was going to break away, it will be your state but you have to look at the big picture. Like I said before when the state gets in a broke position they will tax everything.Rome and the USA have many things in common. They both had standing armies which a very expensive to maintain and politicians like to make use of them because they want some return for the money they spend. The USA has had some very smart leaders in the past. George Washington said in his final address, " No foreign entanglements" and "Eisenhower's warning about the military industrial complex" was very good advice. These guys knew that their expense will bring your nation down. Rome promised their army pensions that were never funded and was always going to be taken out of future taxation because politicians always think their are endless drones to tax which of course is not true. Rome ended up taxing their citizens so much folks simply grabbed their posessions and walked away from their property. Rome had over a million citizens and within a decade Romes population was reduced to tens of thousands. This event delivered humanity into fuedalism until the enlightenment.You are like me, you own a house mortgage free and you think that you will be safe, I am debt free too. The only issue is when owning property you are stuck with a non movable asset which they can tax at anytime, they know whom owns it and they know where the property is. Did you see that painting this week that was sold for 430 million? That is not about art, that is money moving off the grid. You can buy a building but they can tax that for simply owning it! You buy gold/silver but is that amount really mobile? Think about a painting is movable in your car or train or you can put it under your sofa or move it accross borders easily.I live in the UK but I also have a NZ passport and at the moment am buying a passport for an eastern european country, I am just trying to give myself options. I love America, the founding fathers were true intellectuals and your right to bare arms should NEVER be given up. When your govt becomes tyrannical, you have a duty to protect your freedom and liberty.May I quote Thomas Jefferson,"When the representative body have lost the confidence of their constituents, when they have notoriously made sale of their most valuable rights, when they have assumed to themselves powers which the people never put into their hands, then indeed their continuing in office becomes dangerous to the state, and calls for an exercise of the power of dissolution.”“what country can preserve its liberties if their rulers are not warned from time to time that their people preserve the spirit of resistance? Let them take arms. The remedy is to set them right as to facts, pardon and pacify them. What signify a few lives lost in a century or two? The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. It is its natural manure.”“The natural progress of things is for liberty to yield, and government to gain ground."

In reply to by Ruger556

TheMexican Fri, 11/17/2017 - 10:28 Permalink

Junk bonds could be the canary in the coal mine.  Certainly they have rolled over and many hedge funds are bailing on their leveraged trend following strategies.