Risky US corporate bond funds suffered the largest weekly redemptions since the US election in November, as oil prices settled at their lowest level since December and benchmark stock indices slipped from record highs.
The high-yield corporate bond asset class, which is comprised of speculative-rated groups judged more likely to default than their investment-grade peers, recorded outflows of roughly $2.8bn in the week to March 8, according to flows tracked by EPFR.
It marked only the second week this year that the sector has experienced withdrawals and coincided with a sell-off in US equities and a jump in junk bond yields. The S&P 500 was on track for its largest weekly decline of the year, down 0.8 per cent by Thursday’s close.
The withdrawals from junk bond funds contrasted with further inflows to US stock funds despite the softer market backdrop, as institutional investors continued to pile into the sector.
More than $7bn was added to funds invested in US equities this week, including $11.4bn from institutional investors, the data showed. Retail investors pulled $4bn from equities. Since Donald Trump was elected president, $87bn has been directed to US stock funds.
“You have to be cognisant that things have moved a lot in a very short period of time,” said Ben Mandel, a strategist with JPMorgan Asset Management. “What is interesting is that the outlook is probably more constructive for the 12-month view than the three-month view. We see all the ingredients of the global reflation theme still intact, low recession risk, a neutral or maybe positive tilt from policy.”
Mr Mandel and Ed Keon, a portfolio manager with asset manager QMA, added that investors were digesting a week of debate over Mr Trump’s new healthcare plan, which is seen as a precursor to the negotiations over tax, regulation and infrastructure spending expected later this year in Congress.
The rally in US stocks since the election has been predicated on faster economic growth, lower taxes and a lighter regulatory regime.
“If the healthcare negotiations end in acrimony, that could be negative for the market because the ability to get a deal passed on other more pro-growth and market-friendly policies falls into doubt,” Mr Keon added.
The move lower in high-yield debt, often closely correlated to moves in stock markets, pushed yields on the broad Bank of America Merrill Lynch junk bond index above 6 per cent on Thursday for the first time since January 3. Yields rise as bond prices fall.
Despite a wave of defaults that have removed some of the weakest oil producers from the main bond indices, investors in the asset class are still closely exposed to swings in the commodity.
Oil companies represented 14.4 per cent of the benchmark BofA Merrill Lynch index as of Thursday. US crude prices have fallen more than 10 per cent from a February peak, settling at $49.28 a barrel on Thursday.
Investors added to emerging market debt positions over the past week, with the asset class absorbing $2.1bn of fresh capital, according to EPFR. Emerging market stock funds reversed last week’s outflows, with $719m added to the sector in the week to March 8.