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August 1, 2014 4:36 pm
Investors fled US junk bonds in July, resulting in the worst monthly performance in more than a year as the looming end of the Federal Reserve’s easy money policy raised concerns about the debt’s torrid rally in recent years.
Investing in junk bonds – or debt issued by low-rated companies – has been one of the biggest consensus trades since the US central bank sparked a global search for yield by lowering interest rates and starting its bond-buying programme, known as “quantitative easing”, to help stimulate the economy.
But in recent weeks concerns over the junk bond market’s potentially frothy valuations and the end of the Fed’s extraordinary policies have combined to spark an exodus from the risky asset class.
Investors pulled $1.5bn from high-yield bond funds in the week to July 30, according to the latest Lipper data, marking the third straight week of outflows.
The new data cap three weeks when at least $5.5bn was withdrawn from the junk bond market, the worst such period since the “taper tantrum” of June last year – a period of harsh selling that followed the Fed’s first signal that it would begin tapering QE.
The retreat from the high-yield market means junk bonds lost 1.33 per cent in July, according to Barclays data, a relatively rare down month in the post-crisis period that has been characterised by voracious demand for higher-yielding assets.
In fact, yields on junk bonds – which move inversely to prices – reached a record low of 4.82 per cent in June as investors scrambled to invest in the debt.
Ashish Shah, head of credit at AllianceBernstein, said July was a good time for “investors to take some chips off the table” as they monetised profits in their high-yield debt portfolios and prepared for the ending of QE.
Investors are also said to have headed for an early exit because of concerns that they may be unable to offload their junk bond portfolios in a period of heavy selling.
The lack of liquidity in the corporate debt market means price moves could be exaggerated, causing losses for junk bond investors who have poured money into a crowded trade.
Mr Shah said: “There’s a little bit of a panic to make sure you get liquidity when you can – it becomes a self-fulfilling prophecy. Investors want to exit early.”
The last day of July was also marked by a broad sell-off in stocks and corporate bonds, as investors digested strong US economic data that added fuel to the debate about when the Fed might need to raise interest rates.
Returns on junk bonds fell 0.61 per cent on July 31, Barclays said, in the worst daily move since June 24 last year – at the height of the taper tantrum.
July 31 “was the first day we saw a bit of a dislocation in the [high-yield bond] market”, said Mr Shah. “There was an imbalance in supply and demand because prices hadn’t backed up enough.”
But he noted: “The search for yield hasn’t ended. This weakness in the high-yield market will bring out new buyers as yields increase.”
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