High yield bond funds suffer record outflow: Lipper

NEW YORK: Investors pulled a record net $3.43 billion out of high yield bond funds in the week ended June 22, rotating cash into the relative safety of higher quality fixed income investments, Thomson Reuters Lipper data showed on Thursday.

"It looks like the big move came at the end of last week. For those who think we are headed for a double-dip recession, the junk market would be the last place you would want to be as a bond investor," said Matthew Lemieux, research analyst at Lipper.

"A second reason might be that we have seen a lack of supply of high yield paper. That might also be a sign of concern to investors."

The record net outflow from high yield bond funds dovetails with a hefty $4.5 billion net outflow from US domiciled equity funds, near evenly split between domestic and non domestic equity-focused funds, the data showed.

Excluding the influence of exchange traded funds, which are anecdotally viewed as expressing the opinion of institutional investors, equity funds still had net outflows of $1.16 billion.

The biggest net outflow among ETFs was the $1.76 billion from the SPDR S&P 500 fund, followed by the $749 million net outflow from the iShares: MSCI EAFE index fund, which tracks stocks, traded in European, Australasian and Far Eastern markets.

"We're still fairly cautious in the near term. The strategy we've been communicating is that it is OK to stay on the sidelines because the headwinds are still quite strong for global equity markets in almost every region," said Kate Moore, senior global equity strategist at Bank of America Merrill Lynch in New York.

Headwinds include the fractious debate in the United States over the federal debt ceiling and the budget, the unfolding sovereign debt crisis in Europe, and a Japanese economy still struggling to overcome the tsunami and nuclear disaster.

In addition, Moore says the firm sees a continuation of tighter monetary and fiscal policies in emerging markets during the second half of the year.

The cash that fled high yield bond funds and equities, however, did not end up on the traditional sidelines. Money market mutual funds had a net outflow of $6.8 billion, while municipal bond funds brought in a net $137 million in the latest week.

The outflow from the high yield sector led to the lowest net inflow for all taxable bond funds since mid-November of last year, although the sector did have outflows in mid-December.

The safety trade did help pull $617 million into US Treasury-focused funds.

"We saw a pretty strong week into Treasury funds, the largest in a year," said Matthew Lemieux, research analyst at Lipper.

In emerging markets, the debt funds managed to pull in $118 million, while the equity funds had outflows of $618 million, the worst performance since the first week in March.

Bank loan funds, which reset their interest rates periodically and benefit from a rising rate environment, have consistently attracted money for nearly a year. However, in the latest week, their intake of fresh cash was the lowest since mid-August.

Investors pushed money into the funds on speculation interest rates would start to rise again as economic growth rebounded due to the government stimulus and historic low official interest rates.

However, this latest week's low performance comes as the US economy shows strains. The US Federal Reserve confirmed as much on Wednesday by cutting its gross domestic product forecast for this year without a hint of further monetary support.

The weekly Lipper fund flow data is compiled from reports issued by US-domiciled mutual funds and exchange-traded funds.

Copyright Reuters, 2011