Morning Commentary: Investment-grade outflows continue; short-term inflows hit record

By Cristal Cody

Tupelo, Miss., Dec. 21 – High-grade market sources had an eye toward a potentially long-term U.S. government shutdown over border wall funding on Friday as desks thin ahead of the Christmas Day holiday in the upcoming week.

No high-grade issuers have tapped the primary market week to date, though an active January deal calendar is building, a source said.

Secondary trading volume was heavier on Thursday with $17.81 billion of bonds traded, up from $16.1 billion on Wednesday, $17.1 billion on Tuesday and $16.66 billion on Monday, according to Trace.

Credit spreads have widened nearly 10 basis points over the week, including easing 8 bps in the past two sessions following the Federal Reserve’s monetary policy rate hike and dovish statement on Wednesday.

For the week ended Dec. 19, Lipper US Fund Flows reported a fourth consecutive week of outflows. Corporate investment-grade funds had outflows of $3.93 billion, up from outflows of $3.72 billion in the prior week.

Money is “flowing into safer fixed-income assets such as short-term high grade and government bonds,” BofA Merrill Lynch analyst Yuri Seliger said in a note released on Friday. “That helped reduce outflows from fixed income overall to $2.12 [billion] from $5.76 [billion] in the prior week, when investors instead bought money markets.”

Outflows from the high-grade space, which BofA Merrill Lynch lists as including corporates, Treasuries, agencies and mortgage bonds, moderated to $540 million for the week ended Wednesday from $2.72 billion in the previous week, Seliger said.

“Strong demand for short-term high grade offset continued elevated redemptions [excluding] short-term,” he said.

Inflows to the short-term high-grade space jumped to a record high of $3.25 billion from $780 million in the week-ago period, according to the report.

Outflows excluding short-term rose to $3.78 billion for the week from $3.49 billion. High-grade funds also continued to report outflows of $3.09 billion, down from a $3.92 billion outflow in the previous week, according to the report.

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