Junk funds see $2.67 billion inflow, second huge inflow in a row

By Paul Deckelman

New York, Feb. 5 – High-yield mutual funds and exchange-traded funds, which are considered a reliable barometer of overall junk market liquidity trends, saw their second giant-sized inflow in as many weeks, market sources said Thursday, putting those flows on a solidly positive footing for the year to date.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $2.67 billion more came into those funds than left them during the week ended Wednesday.

That was almost as large as the $2.77 billion cash surge reported last Thursday by Arcata, Calif.-based AMG, a unit of the Lipper analytics division of Thomson Reuters Corp., for the seven-day period ended Jan. 28. That previous inflow was not only easily the biggest seen so far this year but also the fourth-largest weekly cash injection seen since the company began tracking the funds in 1992, according to a Prospect News analysis of the data. It was the largest inflow seen since the net $3.1 billion that came into the funds in the week ended Sept. 25, 2013, the third-biggest all-time inflow. Last week’s cash cascade surpassed the net $2.44 billion that had come into the funds during the week ended Nov. 15, 2014 – last year’s biggest inflow, according to the data.

The latest week’s inflow was in a tie for fifth-largest ever cash addition, matching the net $2.67 billion that had come into the funds during the week ended July 17, 2012.

The two huge back-to-back inflows, totaling $5.44 billion, have largely – though not completely – offset the pattern of weakness seen in the fund flows since early December, coinciding with the great volatility the high-yield market has shown in the wake of sharply sliding oil prices and their negative impact on junk-rated energy companies.

During the week ended Jan. 21, the funds had seen a $241.3 million outflow – the seventh in the previous eight weeks, a losing streak interrupted only by an $879.5 million inflow during the week ended Jan. 14. Before that had come six consecutive outflows totaling $8.05 billion, according to the analysis; counting that previous inflow and the outflow that followed it, the funds had lost a net $7.41 billion during the eight-week stretch, according to the analysis.

A trader, speaking before the fund-flow numbers were released, opined that “the market feels strong in general. I’m hearing another probably pretty decent inflow number,” estimating it as “north of $2 billion.”

Yearly total solidly positive

The current week’s big inflow moved cumulative fund flows for the year so far further into solidly positive territory.

It was the third inflow seen so far this year, matched against two 2015 outflows so far – the $241.3 million in the Jan. 21 week, plus a $922 million cash loss recorded in the year’s first week, ended Jan. 7.

It brought the year-to-date net inflow total up to $5.15 billion from the previous week’s $2.48 billion inflow for 2015. Last week had put the cumulative fund-flows figure for the nascent year back into the black after having three consecutive weeks of red ink before that, according to Lipper.

In 2014, inflows had been seen in 31 weeks, versus 21 weeks of outflows, according to the analysis.

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.

EPFR sees another cash surge

Another fund-tracking service, Cambridge, Mass.-based EPFR Global, meantime saw what a market source estimated as an over $3.5 billion inflow in the latest week, on top of last week’s cash addition, which he called “the biggest inflow since the third week in October in 2013.” That was in contrast to the Jan. 21 week, when the service had seen a “similar” outflow number to AMG/Lipper’s. That, in turn, had followed “a small inflow” the week before, which had snapped a six-week losing streak.

EPFR’s methodology differs from AMG/Lipper’s, as its fund universe includes many non-U.S.-domiciled mutual funds and ETFs, including strictly European junk funds and broader global funds, versus AMG/Lipper’s solely domestic orientation.

The two services’ respective weekly results usually point pretty much in the same direction, with EPFR, like AMG/Lipper, having now seen three inflows versus two outflows so far this year and having also seen inflows in 31 weeks versus 21 outflows last year, according to a Prospect News analysis of those figures, the same as AMG/Lipper.

However, that has not always strictly been the case. In 2014, as in years before that, there were some rare weeks when AMG/Lipper showed outflows while EPFR saw overall inflows or vice versa.

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 was 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 turned 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 behind the year-earlier totals as the year came to a close.

So far this year, with inconsistent and indecisive fund flows before the last two weeks, the secondary market initially struggled, producing only modestly positive results, although it seems to have lately found its footing, with annualized returns now above the 1% mark for the first time this year.

Primary issuance of $25.01 billion of new dollar-denominated, fully junk-rate paper from domestic or industrialized-country issuers, in 42 tranches as of Thursday’s close, lags 11.5% behind the red-hot new-deal pace seen a year ago, when $28.28 billion had priced in 49 tranches by this point on the calendar. However, that gap is closing; it had been a 32% difference a week ago.

Corporates continue climb

Looking at the fund flows for other asset classes, investment-grade corporate bond funds saw a $4.38 billion inflow for the week on top of the previous week’s $2.87 billion cash addition. It was the funds’ fifth straight weekly gain and their sixth in the last seven weeks.

This week’s inflow to those high-grade funds was the second biggest since Lipper began tracking the funds, the company said, lagging only the $6.89 billion inflow seen last October.

It brought the high-grade funds’ year-to-date net inflow figure up to $12.84 billion from $8.47 billion last week, according to the Lipper figures.

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

Leveraged-loan participation funds, on the other hand, saw outflows of $511.3 million, on the heels of last week’s $443.1 million retreat. It was the 30th consecutive weekly outflow from those funds, which have been struggling mightily since last April, when an incredible winning streak of nearly two consecutive years of weekly inflows abruptly came to an end.

With five 2015 reporting weeks in the books, the loan funds have seen $2.66 billion of net outflows so far, up from the prior week’s $2.15 billion total.

In 2014, the funds racked up cumulative red ink for the year of $17.26 billion.

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