U.S. high-yield bond funds draw cash as recession fears ebb

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A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., July 26, 2022. REUTERS/Brendan McDermid

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Aug 11 (Reuters) – U.S. high-yield bond funds are attracting big investment, a reversal from a sell-off in the first half of this year, as investors bet the Federal Reserve will limit future interest rate hikes in an attempt to avoid an economic downturn.

Fund managers are also increasing their investments in junk bonds to take advantage of widening yield spreads, with bonds trading at deeper discounts than at the start of the year.

Refinitiv data shows U.S. high-yield bond funds received an inflow of $4.8 billion in July, the first monthly inflow in 2022.

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Flows of US high yield bond funds

So far in August, U.S. high-yield bond ETFs are up $2.18 billion, the data showed.

The biggest money inflows into US high-yield bond ETFs this month

“High-yield bond funds are getting inflows because of excitement that the U.S. economy will avoid a recession or, if it does, be mild,” said Thomas Samuelson, chief investment officer at Vineyard Global. Advisors.

“Less severe recessions cause less stress on corporate cash flows and therefore fewer defaults on riskier high-yield bonds.”

U.S. high-yield bond funds saw a cumulative outflow of $52.25 billion in the first half of this year as the U.S. central bank raised interest rates aggressively to tame soaring pressures on prices.

But a drop in commodity prices in recent weeks has dampened expectations of higher inflation.

The ICE BofA US High Yield Index (.MERH0A0), a benchmark for the junk bond market, has risen more than 7% since July, after falling 14% in the first half of this year.

The yield spread between the junk bond index and US Treasuries stood at 452 basis points on Thursday, well above the 285 basis points at the start of the year.

TOO EARLY FOR THE “ALL CLEAR” SIGN

Some fund managers said high-yield bonds also helped diversify portfolios and provided some security, meaning many companies issuing junk bonds had stronger balance sheets.

Data from CreditSights revealed that the US high yield distress ratio, a measure of risk in the bond market, fell to 10.6% in July from 15.2 in June, suggesting that default rates moderate.

“Structurally, we find that high-yield asset allocators are more aggressive about how they allocate using core/satellite approaches, which is common in equities, but was not common in stocks. high-yield bonds,” said Manuel Hayes, senior portfolio manager at Insight. Investment.

Some investors remain wary.

“We think it’s too early to plant the ‘all clear’ sign..” Vineyard’s Samuelson said.

“We are maintaining our underweight position in high yield bonds until we see more evidence that the Fed is near the end of its tightening cycle and the risk of a recession subsides.”

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Reporting by Patturaja Murugaboopathy; additional reporting by Gaurav Dogra in Bengaluru Editing by Vidya Ranganathan and Barbara Lewis

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