Junk funds see $2.94 billion inflow for week, third huge inflow in row

By Paul Deckelman

New York, Feb. 12 – High-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends, saw their third giant-sized inflow in as many weeks, market sources said Thursday.

That gain extended and strengthened the flows’ already-solidly positive footing for the year to date.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said that $2.94 billion more came into those funds than left them during the week ended Wednesday.

That was an even bigger cash injection than had been seen in either of the two previous weeks – the $2.67 billion net inflow 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 Feb. 4 and the $2.77 billion cash surge recorded during the week ended Jan. 28.

The current week’s cash cascade was not only the biggest seen so far this year, surpassing the previous record holder, the inflow in the Jan. 28th week, 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.

That bumped the Jan. 28th weekly inflow down one notch in the standings to just the fifth-biggest ever, which in turn pushed last week’s inflow, and an identically sized $2.67 billion net cash gain that had come into the funds during the week ended July 17, 2012, down by one position to sixth-biggest.

Each of the huge inflows seen over the past three weeks meanwhile easily 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.

Taken together, the three huge back-to-back-to-back inflows, totaling $8.37 billion, have now fully offset the pattern of weakness that had been 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 before the recent rally, according to the analysis.

A trader, speaking before the fund-flow numbers were released, said that he had heard that “we’re going to get a pretty decent-sized inflow this week,” presciently predicting “maybe it will be $2 billion-plus again.”

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 fourth 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, which ended Jan. 7.

It brought the year-to-date net inflow total up to $8.09 billion from the previous week’s $5.15 billion inflow for 2015. In late January, the cumulative fund-flows figure for the nascent year had moved 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.

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.

Earlier this year, with inconsistent and indecisive fund flows before the last three weeks, the secondary market initially struggled, producing only modestly positive results, although it seems to have lately found its footing, with annualized returns now approaching the 2% mark for the first time this year.

According to data compiled by Prospect News, primary issuance of $38.55 billion of new dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers in 62 tranches as of Thursday’s close was running 19.6% ahead of the new-deal pace seen a year ago, when $32.22 billion had priced in 59 tranches by this point on the calendar. The latest week’s surge in new issuance more than erased what had been an 11.5% deficit versus last year’s pace seen just a week ago.

Corporates continue climb

Looking at the fund flows for other asset classes, investment-grade corporate bond funds saw a $2.34 billion inflow for the week on top of the previous week’s $4.38 billion cash addition. It was the funds’ sixth straight weekly gain and their seventh in the last eight weeks.

Last 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.

The latest week’s gain meantime brought the high-grade funds’ year-to-date net inflow figure up to $15.18 billion from $12.84 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 $25 million on the heels of last week’s $511.3 million retreat. While only a relatively small outflow, it was still the 31st 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 six 2015 reporting weeks in the books, the loan funds have seen $2.69 billion of net outflows so far, up from the prior week’s $2.66 billion total.

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

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