Junk funds lose $227 million, second consecutive outflow and fifth in last six weeks

By Paul Deckelman

New York, Sept. 3 – High-yield mutual funds and exchange-traded funds – considered a reliable barometer of overall junk market liquidity trends – saw net redemptions by investors for a second consecutive week and for a fifth week out of the last six, including three consecutive weeks of billion-dollar-plus cash losses.

Sources familiar with the fund-flow statistics generated by AMG Data Services Inc. said Thursday that $227 million more had left those weekly reporting-only funds than had come into them during the week ended Wednesday.

That outflow came on the heels of the $1.60 billion cash loss that was reported last week for the seven-day period ended Aug. 26 by the Arcata, Calif.-based unit of Thomson Reuters Corp.’s Lipper analytics division.

Those downturns reestablished the recent negative trend in fund flows, a pattern interrupted only by the $111.1 million inflow seen during the week ended Aug. 19.

That gain, in turn, had followed the three consecutive weekly outflows seen before that, totaling some $4.14 billion.

These included a $1.21 billion net decline during the week ended Aug. 12, on top of an almost identically sized $1.20 billion outflow during the week ended Aug. 5, and before that, a $1.72 billion cash loss in the week ended July 29.

That earlier outflow had snapped a three-week winning streak before that totaling $1.36 billion – a modest $45.08 million cash addition recorded during the week ended July 8, followed by the robust $1.23 billion inflow in the week ended July 15 and capped off by the more sedate. $81.8 million net inflow for the week ended July 22.

Although there have been a few inflows in recent weeks, things have lately been considerably more negative as a rule; in the last 20 weeks, the funds have seen 13 outflows, according to a Prospect News analysis of the figures, versus just seven gains.

Year-to-date outflow worsens

On a longer-term basis, with 35 weeks in the books so far this year, the current week’s outflow marked the 17th such weekly cash loss, versus 18 weekly cash gains since the year began.

It worsened the year-to-date net outflow the funds have seen to some $3.28 billion – the biggest cumulative deficit so far this year – from the $3.06 billion observed last week, the funds’ previous low point for the year so far.

Going back to the beginning of the year, two outflows were seen in the first three weeks of 2015, starting the cumulative fund flows figure for the nascent year off in the red. It only got back into the black in late January, according to the Prospect News analysis of the data, but then stayed in positive territory for most of the months after that, reaching a peak cumulative inflow level of $11.48 billion during the week ended April 15.

However, things started to go downhill after that, with net inflows steadily deteriorating from the peak until they were last seen during the week ended July 29, when the funds were still in the black to the tune of $849.09 million. Cumulative fund flows tumbled back into negative territory for the first time since January during the week ended Aug. 5, showing a $351.91 million net outflow for the year at that point, and the red ink has deepened since then.

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

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.

Flows propel primary

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 has been 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 did turn 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 a little behind the year-earlier totals as the year came to a close.

Earlier this year, with inconsistent and indecisive fund flows, the secondary market initially struggled, producing only modestly positive results. After that, the market seemed to find its footing, with year-to-date returns seen to have pushed above the psychologically significant 4% mark by the end of May. But starting in June, the junk market gave all of that back, and then some, with returns dipping into negative territory for the first time since mid-January, although there seemed to be a revival last week and so far this week, with returns having edged back into the black, for now.

Primary issuance, driven by ample liquidity, was fairly robust for most of the year, although it slowed markedly in recent weeks, in line with sagging overall market performance.

According to data compiled by Prospect News, with no new junk bonds seen having come to market since Aug. 19, some $205.43 billion of new U.S. dollar-denominated, fully junk-rated paper from domestic or industrialized-country issuers had priced in 335 tranches as of Thursday’s close, running about 2.8% behind the $211.36 billion that had priced in 404 tranches by this point on the calendar in 2014.

With Labor Day coming a full week later in September this year than it did last year, thus extending the hiatus, last year’s issuance advantage over this year grew, after three straight weeks during which the 2014 and 2015 totals had been essentially tied.

This year’s issuance pace recently dwindled markedly after having run for many weeks solidly ahead of the new-deal pace seen a year ago.

Corporates fall again

Looking at the fund flows for other asset classes, investment-grade corporate bond funds posted a net outflow of $2.27 billion during the week ended Wednesday – their biggest weekly loss since 2013.

It was the sixth consecutive outflow for the corporate bond funds, following on the heels of last week’s $1.99 billion cash hemorrhage. Before that had come an outflow of $1.09 billion in the week ended Aug. 19, a $1.85 billion outflow for the week ended Aug. 12, a $1.26 billion outflow in the week ended July 29 and a $740.2 million downturn during the week ended Aug. 5.

Those six outflows, in turn, have followed three straight inflows, including $889 million in the week ended July 22. The funds also gained $267.5 million during the week ended July 15, on top of a $1.09 billion gain for the week ended July 8. That earlier inflow had broken a losing streak that had seen outflows from those funds over the previous four consecutive weeks and in five out of the prior six weeks.

Despite the recent weakness, inflows have still now been seen in 22 weeks out of the 35 since the start of the year, against 13 weeks of outflows. The year-to-date net inflow number stood at some $20.91 billion, down from last week’s $23.18 billion, according to a Prospect News analysis of the figures.

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

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