US Investor Exodus from Junk Bonds

Growing expectations by investors that the Federal Reserve could begin raising US interest rates as the economy recovers has triggered a record US$7.1bn withdrawal from junk bond funds over the week ended 6 August.

The figure indicates that a flight first seen last month is accelerating, with net outflows this year now at US$9.75bn, according to data provider Lipper.

The latest exodus followed a 1.3% loss for US junk bonds in July, the first monthly decline since August 2013, according to Bank of America Merrill Lynch (BofA Merrill) index data. In addition to a potential interest rate rise, concerns are also growing that the bonds are overvalued.

US junk bond funds attracted inflows of US$2.61bn in May this year, but the next month saw about US$1.14bn of withdrawals and a further US$5.4bn of outflows in July. Of the latest week’s US$7.1bn outflow, about US$1.3bn came out of exchange traded funds (ETFs), said Jeff Tjornehoj, head of Lipper Americas research.

The outflow total comfortably exceeds the previous record weekly withdrawal from US junk bond funds of US$4.6bn in June 2013. In recent years, investors have been attracted to the US$1.6 trillion US junk bond market in recent years, with the income the bonds paid above debt perceived as safer issued by investment-grade companies during a period of low interest rates.

Sales of speculative-grade bonds have made their slowest start to a month since July 2013, with US$640m of issuance in the US, according to data compiled by Bloomberg. Companies issued US$227bn of the debt during the first seven months of 2014, on pace to surpass last year’s record US$346.7bn of sales.

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