Junk funds see $2.56 billion outflow, second loss in past three weeks

By Paul Deckelman

New York, June 11 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, returned to their recent mostly negative pattern this week, posting a huge outflow, their second such loss in the past three weeks.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $2.56 billion more left those weekly-reporting-only funds than came into them during the week ended Wednesday.

That was a resounding reversal from the $600.8 million cash gain for the seven-day period ended June 3 that was reported last Thursday by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

The funds had also shown a loss of $111.1 million during the week ended May 27.

The latest outflow was also the sixth such setback seen in the last eight weeks.

There had also been a second inflow in there – $906 million during the week ended May 20 – but before that, there had been four consecutive outflows totaling $3.85 billion from the week ended April 22 through the week ended May 13, according to a Prospect News analysis of the figures. That losing streak had included a $2.75 billion cash hemorrhage seen in the week ended May 6 – the biggest cash plunge seen so far this year, according to the analysis.

Those four weeks of losses, in turn, had followed four consecutive weeks of inflows through the week ended April 15 that totaled $3.31 billion, according to the analysis.

This week’s outflow was the second biggest so far this year, exceeded only by the May 6 cash slide.

The big downturn came as no real surprise to analysts, who on a day-by-day basis noted mostly outflows, some of them quite large, from dedicated high-yield mutual funds and ETFs over the past week.

Year’s net inflow grows

With 23 weeks in the books so far this year, the current week’s outflow marked the 10th loss seen so far in 2015, against 13 inflows.

It lowered the year-to-date net inflow total to $6.46 billion from $9.02 billion last week.

Those year-to-date totals remain well below the $11.48 billion seen during the week ended April 15, the peak cumulative inflow total so far.

Two outflows were seen in the first three weeks of 2015, starting the cumulative fund flows figure for the nascent year off in the red. It only got back into the black in late January, according to the Prospect News analysis of the data, but it has stayed in positive territory ever since then.

In 2014, inflows had been seen in 31 weeks versus 21 weeks of outflows, the analysis indicated.

Despite that roughly 3-to-2 numerical edge for the inflows, cumulative fund flows for the year were negative, finishing the year $6.27 billion in the red.

Cumulative fund-flow estimates may be revised upward or downward, or they may be rounded off and could include unannounced revisions and adjustments to figures from prior weeks.

Inflows propel primary

Although the mutual funds and ETFs represent only a relatively small percentage of the total amount of investor money coming into or leaving the more than $1.5 trillion junk market, their flows are very observable and quantifiable – more so than those of other, larger cash sources – and they thus are suited to act as a fairly reliable proxy for overall junk market liquidity trends.

Analysts said that the sustained flows of fresh cash into junk from all sources has been a key catalyst behind the relatively strong performance seen by both the junk primary and secondary markets over the past several years.

Although secondary market performance did turn erratic during the 2014 third quarter after a strong start and deteriorated over several weeks late in the year, declining sharply in line with big energy-sector losses, last year’s new issuance ran slightly ahead of 2013’s near-record pace for much of the latter part of the year, only to finally fall a little behind the year-earlier totals as the year came to a close.

Earlier this year, with inconsistent and indecisive fund flows, the secondary market initially struggled, producing only modestly positive results. After that, the market seemed to find its footing, with year-to-date returns seen to have pushed above the psychologically significant 4% mark by the end of May. But June has seen something of a retrenchment, with the cumulative returns currently back down in the 3% region.

However, primary issuance remains robust. According to data compiled by Prospect News, $174.19 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 280 tranches as of Thursday’s close, running nearly 12% ahead of the new-deal pace seen a year ago, when $155.97 billion had priced in 289 tranches by this point on the calendar.

Corporates also lower

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted an outflow of $110 million for the week, partially reversing the inflow of $231.6 million seen last week.

It was the second outflow in three weeks for the high-grade funds, there having also been a $127.1 million downturn during the week ended May 27.

Continuing the recently choppy pattern of fund flows for the corporate funds, which had shown considerable strength in posting a number of consecutive weekly inflows earlier in the year, that outflow had followed two consecutive weeks of gains, including the $933 million inflow seen during the week ended May 20 and $958 million in the week ended May 13.

Those two weeks of inflows, in turn, followed a $531.1 million outflow during the week ended May 6.

Inflows have now been seen in 19 weeks out of the 23 since the start of the year, against just four outflows, the other one having occurred during the week ended April 15.

This week’s outflow lowered the high-grade funds’ year-to-date net cash gain to $29.04 billion from last week’s $29.15 billion.

Last week’s year-to-date figure represents the peak level for 2015 so far.

In 2014, the funds generated $86.11 billion of net inflows for the year.

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