Morning Commentary: Investment-grade primary quiet; inflows rise, switch to outflows forecast

By Cristal Cody

Tupelo, Miss., Feb. 9 – Friday opened with light activity and no reported issuers marketing bonds in the high-grade market.

Market action has been hampered over the week on the correction in stocks and volatility in Treasuries. Equities were modestly better over the morning.

The three-month Libor yield rose 1 basis point to 1.8% on Friday, a source said.

High-grade credit spreads also have widened.

The Markit CDX North American Investment Grade 29 index eased about 6 bps to close on Thursday at a spread of 61 bps.

The market volatility has impacted flows for U.S.-domiciled funds and ETFs, BofA Merrill Lynch analyst Yuri Seliger said in a note released on Friday.

Inflows to high-grade bond funds and ETFs actually rose to a high $5.28 billion for the period ending Feb. 7 from $4.82 billion in the previous week, according to the note.

“Supporting the increase was a $2.15 [billion] inflow to short-term high grade – the highest since March 2013 – and up from a $0.69 [billion] inflow in the prior week,” Seliger said.

Outside of short-term, inflows decelerated to $3.13 billion from $4.13 billion, including a $1.56 billion outflow from long-term high grade. Inflows to high grade ETFs declined to $740 million from $2.14 billion, while inflows to funds increased to $4.54 billion from $2.68 billion.

However, a large $2.7 billion inflow on Feb. 1 “masks that daily inflows have been declining gradually over the past couple of weeks” to reach only $87 million on Thursday, Hans Mikkelsen, a BofA Merrill Lynch analyst, said in the note.

“Given total return losses, the increase in rates vol and the decline in equities, this means we are about to switch to daily outflows from high grade,” Mikkelsen said. “Then as markets stabilize over the coming couple weeks and we get past the Chinese New Year, foreign demand in the back end of the curve should accelerate.”

While bond supply has been light over the week, secondary trading has been heavy. On Thursday, $20.99 billion of bonds were traded, while Wednesday’s session saw $22.77 billion of issues traded, Tuesday’s volume totaled $23.88 billion, and $14.94 billion of bonds were traded on Monday, according to Trace.

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