Huge inflows to U.S. high-yield bond, investment-grade debt funds

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(Reuters) – Investors’ appetite for risk-taking was strong in the latest week, as U.S.-based high-yield junk bond funds attracted more than $2 billion in the week ended Wednesday, marking the group’s fourth consecutive week of inflows, according to Refinitiv’s Lipper research service data.

Additionally, U.S.-based investment-grade corporate bond funds attracted over $2.9 billion in the period, extending their weekly inflow streak since early January, Lipper said.

Investors’ appetite for risk assets and their hunt for yield intensified after the Federal Reserve on March 20 brought its three-year drive to tighten monetary policy to an abrupt end. The Fed abandoned projections for any interest rate hikes this year amid signs of an economic slowdown, and said it would halt the steady decline of its balance sheet in September.

“Bond funds in general took off … when the Federal Reserve announced that it was taking its foot off the brakes – no more rate hikes until inflation warrants it and the balance sheet reduction program would be ending,” said Pat Keon, senior research analyst at Lipper.

In the fourth quarter, high-yield bond funds were the worst performing fixed-income funds peer group – down 4.54% – and the best in the first quarter – up 6.56%, Keon noted.

“The flip in investor sentiment regarding high-yield funds can be seen in the group’s fund-flows results, as they had net outflows of $20.7 billion in Q4 – second worst quarterly net outflow ever – and they have taken in $14.3 billion in net new money in Q1 – the second best quarterly net inflow ever,” Keon said.

Leveraged loan funds have been in a prolonged slump, however. Keon said they have had 20 straight weeks of outflows during which time they have seen over $24 billion in cash withdrawals. “Unlike the rest of the fixed-income universe, it is a negative for loan funds when the Fed holds rates static – or decreases rates,” Keon said. “This is because loans have floating rates that benefit from interest rate hikes.”

U.S.-based stock funds also posted another rough week. U.S. equity funds and domestic equity funds saw cash withdrawals of $3.9 billion and $3.8 billion, respectively. In the previous week, U.S. equity funds and domestic equity funds posted outflows of over $11 billion and $10.23 billion, respectively.

Reporting by Jennifer Ablan; Editing by Dan Grebler and Chris Reese

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