Investors pull in $15.8 billion from U.S. junk bond funds to start year, worst outflows since 2010: Goldman Sachs

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Funds specializing in US high-yield bonds or “junk bonds” had their worst outflows to start a year since 2010, according to a tally by Goldman Sachs research.

With an additional $3.5 billion in weekly outflows through Thursday, investors have withdrawn a total of $15.8 billion from U.S. junk bond funds year-to-date, the most on the same period in a dozen years, according to Goldman.

“In the USD and EUR markets, the composition of fund flows continues to show strong aversion to HY bonds,” wrote Goldman’s credit research team led by Lotfi Karoui, in a weekly client note.

The rebuke to junk bond funds and other risky assets comes as the Federal Reserve prepares to tackle inflation set at 40-year highs, first by raising short-term rates for the first time since 2018, then starting to cut its near $9. trillion balance sheet.

European high-yield bond funds recorded $1.5 billion in weekly outflows, considered by Goldman analysts to be the largest on record.

Investor sentiment deteriorated further on Friday after White House national security adviser Jake Sullivan said Moscow was able to mount ‘major military action’ in Ukraine and an invasion could begin “from one day to another”.

The Dow Jones Industrial Average DJIA closed down 503 points on Friday, or 1.4%, while the S&P 500 SPX lost 1.9% and the Nasdaq Composite Index COMP finished down 2.8%. . US stocks also posted weekly losses.

Credit investors often sell ETFs first to get cash when markets get choppy. The iShares iBoxx $ High Yield Corporate Bond ETF, HYG,
-0.35%
the largest U.S. junk bond exchange-traded fund in the industry, was down just 0.4% on Friday, but down 5.1% on the year, according to FactSet.

flow to float

Wall Street is bracing for a regime of higher interest rates this year, especially after St. Louis Fed President James Bullard said Thursday he wants to see a cumulative 100 basis point increase in the central bank policy rate by July 1.

See: Fed ‘firestorm’ of hawkish speculation erupts after strong US inflation reading

“From our perspective, we don’t think this is as much a story of de-risking from a credit perspective as investors taking Fed headlines at face value and not realizing that interest rates have already risen significantly,” Daniela Mardarovici, co-head of multi-sector fixed income at Macquarie Asset Management, said in a phone interview on Friday.

BX:TMUBMUSD10Y 10-year Treasury yields soared above 2% this week, before falling to 1.93% on Friday. The benchmark is used to value everything from commercial real estate loans to corporate bonds.

Along with the rise, Mardarovici pointed to strong investor inflows into floating-rate and zero-duration funds to kick off 2022, and away from high-yield and other fixed-rate sectors.

Goldman Sachs pegged flows into the bank loan fund at $9.2 billion this year. These funds generally offer investors exposure to floating rate assets.

Extractions in 2022 from US junk funds represent the equivalent of the sector’s loss of 3.8% of assets under management since the start of 2022, according to Goldman’s Karoui.

“As market speculation increases regarding the magnitude of interest rate hikes in 2022, high-yield investors have backed down,” said Jimmy Whang, head of credit and municipal fixed income at the US. Bank at MarketWatch. This was “evidenced by cash outflows, new issue performance and funding,” which shifted from high-yielding to floating-rate sources, he said.

Brian Zinser of Mizuho Securities, chief corporate bond strategist, and his team charted, by asset class, the wall of negative total returns year-to-date, showing that few sectors of the financial markets were in positive territory until February 9:

US high yield total return down 3.1% on the year, but much worse for other assets

Mizuho Titles

“Investor sentiment has shifted dramatically as inflation data and Fed comments have caused markets to reassess risk across all asset classes,” Mizuho’s team said in a note. Thursday, which indicated “a deep hole” for corporate credit yields.

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