Oil:US high yield correlation breaks down
The correlation between oil and US high yield markets broke down in July, indicative of a shift in the focus of the sector.
The correlation between oil and US high yield markets broke down in July, indicative of a shift in the focus of the sector.
Not only fund flows are capricious when it comes to high-yield bonds. Investor sentiment towards the asset class also swings continuously, particularly on a country-by country- basis.
Bank of America Merrill Lynch data revealed 11 July was “the day when bears capitulated into risk assets” with investors flocking to high yield in droves.
High-yield bond volatility has increased markedly over the past two years, which is partly a reflection of mounting macroeconomic uncertainty. But the unprecedented pace at which money is flowing in and out of the asset class suggests there is something more to it.
As recently as April, high yield bonds registered the strongest net inflows since July 2013, the month after the taper tantrum sell-off. But fortunes for the asset class reversed sharply in May, according to Morningstar’s latest fund flows figures.
New research by Morningstar challenges assumptions about the threat ETFs pose to the stability of high yield markets, especially during times of crisis.
The global high-yield default rate will rise to reach 5% in November this year, according to Moody’s Investors Service forecasts.
European investors reduced their high yield bonds holdings by a net €12bn last winter. But the arrival of spring is heralding a change in sentiment.
Money has poured into high yield bond funds at a rare pace over the past month but is this a sound move based on merit, or a case of return-starved investors clutching at straws?
Those who believe that ‘risk-on, risk-off’ is consigned to the past look away now, with record inflows into US high-yield indicating that sentiment has shifted once again to the spicier end of the fixed income spectrum.
Investors are in disagreement about whether high yield bonds are a good buy now. A quarter of European fund buyers plan to increase their allocation in the next 12 months, but an almost equally big share of them intend to decrease exposure. Fund flows have also been capricious of late.
European equity funds are once again in high demand. In November, European equities were the most popular asset class for two consecutive months for the first time since February.