Mutual Fund Flows Keep High Yield Issuers Alive - For Now

New high yield debt issuance has hit levels that we saw back in 2007 as the appetite for bonds returned (at least for now). Not so for loans. In fact some of the bond issuance has been used to refinance loans (see our post called Leveraged loans - a race against time).

The bond demand is coming from the usual suspects - mutual funds. Mutual funds have been keeping the credit markets open. Here is the recent history of mutual fund flows, both bond and equity funds. Note the pop in bond inflows (green line).

Mutual fund flows ($MM)

Source: Investment Company Institute

Loan demand in the past mostly came from CLOs and other types of funds who ended up leveraged them. Most of that market is now gone.

Yet there is a great deal to be refinanced as the maturities for loans are scheduled to accelerate, peaking in 2014 (see the latest chart from JPM below). By refinancing their loans now (with bond issuance), some firms have delayed the day of reckoning. Those who are unable to do so in the next 2-3 years will be facing default.

Comments

[shootpar2001:]

Yes!
Investors are chasing yield; that is what the Fed wants, to move up the risk scale. That is what gets the economy going. With corps. and individuals paying down debt; the savers are investing to collect that monthly 'rent' payment.
Yields are still historically high, and with default rates still below what the doomsayers are predicting the reason to invest is obvious.
As I see more and more layoffs; I know that corps. are still trying to lower their debt levels. The bond fund managers know this too and are helping us investors to reap the rewards of excess spending.
Thank You.

Disclosures: (PTY) (MSY) (DHF)

Aug 04 11:08 AM

[Mad Hedge F...:]

It beats getting zero on you're money market fund. At the beginning of the year I was wildly bullish about junk bonds, and recommended a covey of ETF’s, including the Lehman High Yield Bond Fund (JNK), the PS Corporate High Yield Bond Fund (PHB), and the iShares iBoxx Fund (HYG) (see my report ). At the time, fears about The End of The World triggered cascading margin calls and distress liquidation that saw tidal waves of paper dumped into a no bid market. Some lesser credits traded with yields at 2,500 basis points over Treasuries. JNK is now 54% up from the March lows, and the others have done as well. Once the Great Depression II was taken off the table, the scramble for yield by hedge funds couldn’t have been more awesome. The average spread over Treasuries has been cut from 1,800 basis points to a mere 1,000, which was where spreads maxed out in the 1990 and 2002 recessions, and could be the new “normal.” This is against a 20 year average junk spread of 600 basis points, and only 100 basis points seen at the ultra frothy 2007 peak. The good news is that falling junk yields may eventually force tight fisted commercial banks to ease up on the supply of conventional loans, which is restraining a real economic recovery. Gains on junk from here may be limited. Emerging market corporate issuers inundated this market in Q2, some dubious borrowers are starting to sneak back in, and the rollover calendar going forward is truly enormous. There are too many better fish to fry. I’d take the money and run.

Aug 04 11:35 AM

[update:]

Great Depression two has barely begun. We have just entered the two year stretch of maximum pain that our generation will ever experience.

You green shoot fantasy pinheads are irrelevant but keep on blabbing if it makes you feel good about this shell game.

Aug 04 11:58 AM

[coldcall:]

The fact is BBB and above rated corporate bonds are the best investment going at the moment from a yield/safety perspective.

In many cases i think these companies are more credit worty than the US government so i dont really understand why people would keep piling into awful yielding gov bonds.

Aug 05 03:16 AM