Junk funds see $3 billion outflow, biggest loss so far this year

By Paul Deckelman

New York, July 2 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, turned sharply lower this week, posting their biggest outflow of the year so far.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Thursday that $3 billion more had left those weekly-reporting-only funds than had come into them during the week ended Wednesday.

This week’s outflow represented a sharp reversal from the $621 million inflow reported for the seven-day period ended June 24 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

In the two weeks before that, massive back-to-back outflows totaling $5.45 billion were recorded – a $2.56 billion plunge in the week ended June 10 followed by a $2.89 billion cash loss in the week ended June 17. The latter had been the biggest outflow seen so far this year, but it has now been surpassed by the latest week’s outflow.

This week’s outflow is also the biggest outflow seen since the week ended Dec. 17, 2014, when $3.08 billion more left the funds than came into them.

It represents a resumption of the flow numbers’ recently negative pattern that has now seen outflows in three weeks out of the last four and in eight weeks out of the last 11, according to a Prospect News analysis of the figures.

Year’s net inflow declines

At the halfway mark of 2015, with 26 weeks in the books so far this year, the current week’s outflow marked the 12th such cash loss seen so far against 14 weekly gains.

It lowered the year-to-date net inflow total to $1.19 billion from $4.19 billion last week.

The year-to-date total remains 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.

However, 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 saw a definite retrenchment, with the cumulative returns currently back below 3%.

However, primary issuance remains fairly robust. According to data compiled by Prospect News, $183.63 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 297 tranches as of Thursday’s close, running 2.7% ahead of the new-deal pace seen a year ago, when $178.72 billion had priced in 333 tranches by this point on the calendar.

Corporates lower again

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted an outflow of $655 million for the week. It was the fourth straight downturn for the funds, which had retreated by $366 million last week, $161.2 million in the week ended June 17 and $110 million in the week ended June 10.

It was also the fifth outflow in the past six weeks for the high-grade funds.

Outflows have now been seen in seven weeks out of the 26 since the start of the year against 19 weeks of inflows.

This week’s outflow lowered the high-grade funds’ year-to-date net cash gain to $27.86 billion from last week’s $28.51 billion and from the peak level for 2015 so far, $29.15 billion during the week ended June 3.

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

© 2015 Prospect News.
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