EPFR: 'January effect' looks to be over - but not in high yield; junk funds' YTD inflows top $2 billion

By Paul Deckelman

New York, Jan. 26 - With most of the month of January gone, the traditional "January effect" that lifts financial markets at the start of a new year looks pretty much gone as well - but not in Junkbondland, EPFR Global said Monday, as high-yield bond funds have continued to attract new money, even as most other types of bond funds, as well as equity funds, have found themselves either hemorrhaging cash or, at best, not attracting all that much of it.

"The inflows we've been seeing into the high-yield funds persist into the new year," said Brad Durham, managing director of the Cambridge, Mass.-based fund-tracking service, "while most of the other fund groups" have not seen such a trend, with the possible exception of a few areas like the commodity sector funds and Latin American equities. These had "some modest inflows - but high yield still looks like there's some momentum there."

Inflows top $2 billion

According to data compiled by the service, in the latest reporting week, which ended Wednesday, U.S.-based and internationally oriented junk funds that report on a weekly basis saw a combined net inflow of $329.9 million. This follows inflows of $766.3 million in the week ended Jan. 14 and $910.9 million in the week ended Jan. 7.

Durham said that net inflows this year total some $2.01 billion - and the last three weeks are part of a larger pattern of strength in the junk funds stretching back to the latter part of last year. By EPFR's count, there have been eight consecutive weeks of net inflows, a winning streak that began in early December and that now totals approximately $3.7 billion, and inflows have been seen in 10 out of the last 12 weeks, going back to early November. After several "modest" mid-November outflows, "since then, it's been pure inflows."

An expanding asset class

Durham attributes the continued flow of cash into the high-yield funds to "investors continuing their search for yield" as well as the impact of recent credit downgrades of some issuers to junk status, resulting in "an expanding high-yield asset class, with some of the previously investment-grade credits migrating into the high-yield space" and attracting investors to the junk funds.

The EPFR managing director continued that "the default rate that is assumed by the current yields of high-yield credits is something like 20%, which is rather high."

While all three of the major ratings agencies project a substantial increase in default levels this year, the highest numerical figure being regularly thrown around - so far - is Moody's Investors Service's warning of a year-end default rate somewhat above the peak level of 12% reached in 1991. Standard & Poor's sees a 7.6% baseline U.S. speculative-grade default rate by the end of September and a worst-case figure of 9.6%, with the rate expected to continue rising for the rest of the year, but has not yet established a year-end total rate. Fitch Ratings anticipates a rise into double-digits by year-end but has yet to elaborate further.

So Durham said that if investors believe that fewer than 20% of the high-yielding corporate issuers will default, "it's a pretty good time to increase exposure."

AMG's inflow numbers

EPFR's numbers differ somewhat from the widely tracked high-yield mutual fund-flow numbers compiled by AMG Data Services of Arcata, Calif., due to differences in methodology, with EPFR's calculations for high yield including a sizable chunk of non-U.S. domiciled funds, versus the domestically oriented AMG numbers.

In the most recent week, according to market participants familiar with the AMG statistics, inflows to the weekly reporting junk funds totaled $218.2 million, with a year-to-date total of $1.74 billion and a net inflow over the last eight weeks of some $3.55 billion.

Other funds 'under fire'

While high-yield debt funds continue to attract money, EPFR said that most other classes of fixed-income funds are losing cash or, at best, are not attracting it the way high yield is.

While U.S. municipal bond funds absorbed $166 million in the latest week, and the ex-municipal U.S. bond funds tracked took in over $300 million, global and emerging-markets bond funds "remained under fire, with the former posting outflows for the 48th time in 50 weeks and the latter for 23rd time in 24 weeks, and balanced funds extended their losing streak to 24 consecutive weeks."

EPFR said that the latest source of pressure on the global bond funds is "the uncertainty about the ratings implications of stimulus plans in key sovereign markets, among them Japan and several of the smaller Eurozone members. Downgrades triggered by rising issuance and debt-to-GDP ratios could hurt the values of existing portfolios and cause problems for blue-chip corporate issuers, such as insurance companies, that carry significant sovereign debt on their balance sheets."

On the equity side of the fence, EPFR said investors again pulled money out of U.S. equity funds for the second week in a row as the scope of the economic challenge facing the new Obama administration continues to expand, with the dominant feature being a tidal wave of redemptions from large-cap exchange-traded funds. Japanese and European equity funds also posted outflows, as did most other internationally oriented funds, including emerging markets, with the exception of Latin American equity funds.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.