Junk bond funds saw their biggest outflows since December 2014, as investors expressed concern about high prices for speculative debt and falling energy prices put pressure on companies in the sector.
Investors withdrew $5.7bn from high-yield bond funds in the week up to Wednesday, according to EPFR Global.
It came as West Texas Intermediate, the US crude marker, last week dropped back below $50 a barrel. Oil prices, which have fallen amid concerns of a supply glut, matter for the junk bond market because energy companies make up a significant percentage of junk bond indices.
Investors also attributed the pullback to high prices for junk debt generally.
“Spreads had got really tight,” said Matthew Bartolini, head of SPDR Americas research at SSGA. “There is limited upside relative to the amount of downside you could have if there is some sort of negative headline or sentiment risks that percolate throughout the market.”
Mr Bartolini pointed to risk premiums of just 355 basis points on high-yield bonds at the start of March versus a 20-year average of 578bp. Those levels have since risen to 402bp, he said.
Tad Rivelle, chief investment officer for fixed income at TCW, said that even after the recent sell-off high-yield bonds looked pricey, but pointed out that in a world short of yield that would still attract investors.
“It looks expensive, but that doesn’t mean that you can’t make money from a careful allocation to it,” he said.
Meanwhile, encouraging economic data and the Federal Reserve’s rate increase of a quarter point prompted investors to commit $12bn to US equity funds.
The US equity market rallied on news of the rate increase, which is being taken as a sign of an improving economy.
In spite of the rise, funds that specialise in stocks that pay dividends took in $3.24bn, the most since the first quarter of 2015. Dividend payers such as utilities typically shine in low-rate environments when investors buy them as a substitute for low-yielding bonds.
Europe’s bond and equity funds faced fresh outflows, as results from the Dutch election came too late in EPFR’s recording period to be reflected in this week’s data.
Investors pulled more than $100m from French equity funds. It marks the fourth straight week of outflows totalling more than $500m on jitters about France’s looming elections in which Marine Le Pen of the far-right National Front is a candidate.
