Cash lures investors from high-grade debt http://on.ft.com/1ZF86Mg
Investors made withdrawals for the sixth consecutive week from mutual funds and exchange traded funds buying high-grade US corporate debt, shifting instead to cash after a challenging year for credit.
Funds investing in investment grade corporate bonds counted $1.7bn of outflows in the week to December 30, lifting withdrawals in the fourth quarter to more than $11bn, according to Lipper.
Investors instead piled into money market accounts — effectively sitting in cash — as they counted down the final days of 2015. Money market funds recorded $17bn of fresh capital in the latest week, following two weeks of outflows.
Treasury funds drew in $246m of inflows while junk bond mutual funds and ETFs staunched three weeks of multibillion-dollar outflows, counting $114m of new money. Overall, taxable bond funds were hit by $1.8bn in outflows.
The figures underscore investor resistance to adding risk at year-end after turbulence in both the investment grade and high-yield asset classes.
US corporate credit ratings have deteriorated this year as companies have levered up to fund a record wave of mergers and acquisitions, and finance share buybacks and dividends.
Investors have suffered losses of nearly 1 per cent on US credit as well as a 2.6 per cent decline on high-yield debt — bonds rated triple B minus or lower by one of the major rating agencies — according to Barclays Indices.
A number of fund closures earlier this month also rattled investor nerves, with portfolio managers warning that a dearth of liquidity had made it challenging to trade in and out of bonds.
Investors have attributed much of the recent weakness to volatility in commodities. Crude oil has tumbled by more than a third this year, extending a 48 per cent decline in 2014, while copper has fallen by a quarter.
Analysts with all three leading US rating agencies — Standard & Poor’s, Moody’s and Fitch — expect defaults to increase in 2016, as credit conditions tighten and energy and materials groups struggle with the drop in commodity prices.
“That is one of the other features nipping at the heels of smaller companies,” said Jack Ablin, chief investment officer of BMO Private Bank. “Here we are in the sixth or seventh year of this bull market and all of a sudden it is getting harder to finance yourself.”
Investors have recently pushed back on new deals, requiring companies tapping the junk bond market to tighten investor protections or offer steep discounts.
Investment grade bond yields, which move inversely to price, have climbed 56 basis points over the past 12 months, according to Barclays.
For speculative groups, yields have climbed even faster. Yields on junk bonds have jumped more than 200 basis points since the end of 2014, rising to 8.74 per cent, according to Barclays.