Morning Commentary: Early buying seen Tuesday in high-yield bonds; market eyes recent fund flows

By Paul A. Harris

Portland, Ore., Aug. 12 – There was some buying going on in the high-yield market early Tuesday, according to a portfolio manager based on the East Coast of the United States.

“It's largely ETF-driven,” said the investor, adding that bank loan-only accounts are “dipping their toes in the water, but not extensively.”

Meanwhile, in the wake of last week’s record-breaking outflows from dedicated high-yield funds, cash flows were mixed on Monday, with ETFs seeing $128 million of inflows, while actively managed accounts sustained $190 million of outflows, according the buysider, who referenced material in a report from JPMorgan.

Price moves disproportionate

The mystery of the week in the leverage markets has to do with the relatively shallow price drops in cash bonds relative to the magnitude of the massive, record-breaking $7.1 billion of weekly outflows reported last Thursday by Lipper-AMG, market sources say.

Given the magnitude of the outflows, price drops should have been more severe than those which actually materialized, according to a trader.

On Tuesday morning a high-yield portfolio manager said that much of the selling may have taken place in the synthetic market.

High-yield funds were using the liquid CDX index for portions of their portfolios, and that’s what they sold – instead of bonds – when they needed to raise cash, the manager said.

Hence the drop in cash bond prices was not as steep as the cash outflows suggested they should be, the source added.

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