Junk bond funds show $1.6 billion loss, fourth downturn in five weeks

By Paul Deckelman

New York, Aug. 27 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, returned to their recently negative pattern, posting a loss for this week after an upturn last week.

This week’s outflow was the funds’ fourth in the last five weeks, including three consecutive weeks of billion-dollar-plus cash losses.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Thursday that $1.60 billion more had left those weekly-reporting-only funds than had come into them during the week ended Wednesday.

That stood in contrast to the $111.1 million inflow that was reported last week for the seven-day period ended Aug. 19 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

That gain, in turn, had followed the three consecutive weekly outflows seen before that, totaling $4.14 billion.

These included a $1.21 billion net decline during the week ended Aug. 12, on top of an almost identically sized $1.20 billion outflow during the week ended Aug. 5 and before that a $1.72 billion cash loss in the week ended July 29.

That earlier outflow had snapped a three-week winning streak before that totaling $1.36 billion – a modest $45.08 million cash addition recorded during the week ended July 8 followed by the robust $1.23 billion inflow in the week ended July 15 and capped off by the more sedate $81.8 million net inflow for the week ended July 22.

Although there have been a few inflows in recent weeks, things have lately been considerably more negative as a rule; in the last 19 weeks, the funds have seen 12 outflows, according to a Prospect News analysis of the figures, versus just seven gains.

Year-to-date outflow worsens

On a longer-term basis, with 34 weeks in the books so far this year, the current week’s outflow marked the 16th such weekly cash loss, versus 18 weekly cash gains since the year began.

It more than doubled the year-to-date net outflow the funds have seen to $3.06 billion – the biggest cumulative deficit so far this year – from the $1.46 billion observed last week and from $1.57 billion the week before that, ended Aug. 12, the funds’ previous low point for the year so far.

Going back to the beginning of the year, 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 then stayed in positive territory for most of the months after that, reaching a peak cumulative inflow level of $11.48 billion during the week ended April 15.

However, things started to go downhill after that, with net inflows steadily deteriorating from the peak. For the week ended July 29, the funds were still in the black to the tune of $849.09 million. Then cumulative fund flows tumbled back into negative territory for the first time since January during the week ended Aug. 5, showing a $351.91 million net outflow for the year at that point, and the red ink has deepened 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.

Flows 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 since June, the junk market has given that all back, and then some, with year-to-date returns now slightly negative.

Primary issuance, driven by ample liquidity, has been fairly robust for most of the year, although it slowed markedly in recent weeks, in line with sagging overall market performance.

According to data compiled by Prospect News, $205.43 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 335 tranches as of Thursday’s close – a virtual statistical dead heat with the $205.52 billion that had priced in 396 tranches by this point on the calendar in 2014. With the primary market in its traditional pre-Labor Day lull, the year-to-date figures for both this year and last were unchanged from where they had stood a week ago.

This year’s issuance pace recently dwindled markedly after having run for many weeks solidly ahead of the new-deal pace seen a year ago.

Corporates, loans fall again

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted a net outflow of $1.99 billion during the week ended Wednesday – their biggest weekly loss since June 2013.

It was the fifth consecutive outflow for the corporate bond funds. It followed on the heels of last week’s $1.09 billion cash loss and before that a $1.85 billion cash hemorrhage for the week ended Aug. 12, the previous biggest net outflow seen in more than two years.

The funds had also seen outflows of $1.26 billion in the week ended July 29 and $740.2 million during the week ended Aug. 5.

Those five outflows, in turn, have followed three straight inflows, including $889 million in the week ended July 22. The funds also gained $267.50 million during the week ended July 15, on top of a $1.09 billion gain for the week ended July 8. That earlier inflow had broken a losing streak that had seen outflows from those funds over the previous four consecutive weeks and in five out of the prior six weeks.

Despite the recent weakness, inflows have still now been seen in 22 weeks out of the 34 since the start of the year, against 12 weeks of outflows. The year-to-date net inflow number stood at $23.18 billion, down from last week’s $25.17 billion, according to a Prospect News analysis of the figures.

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

Leveraged loan participation funds, which have been struggling for the most part this year and which have been generally under pressure for more than a year now, saw their fifth consecutive downturn this week, as $796 million more left those funds than came into them – the biggest net loss seen so far in 2015.

That slide followed outflows of $754 million in the week ended Aug. 19, $745 million in the week ended Aug. 12, $594 million in the week ended Aug. 5 and $12.9 million in the week ended July 29.

The current losing streak follows a relatively rare show of strength for the mostly underperforming loan funds – a $208.1 million inflow in the week ended July 22, the most recent weekly inflow reported, and before that, inflows of $33.786 million in the week ended July 15 and $18.2 million in the week ended July 8; that earlier inflow broke a five-week skid that included a $364.6 million outflow in the week ended July 1.

The latest outflow brought the funds’ year-to-date net outflow figure up to around $7.8 billion, according to a Prospect News analysis of the figures.

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