U.S. unwanted bond funds suffered their biggest weekly outflows from the depths of the coronavirus pandemic in March, as investors worry about the sustainability of the U.S. economic recovery.
Investors withdrew $ 4.86 billion from funds that buy U.S. high yield bonds during the week ending Sept. 23, according to EPFR Global data, the worst result since the withdrawal of 5, $ 6 billion in mid-March.
The BlackRock iShares high yield bond exchange-traded fund – known by its ticker symbol HYG – suffered nearly $ 2 billion in cash outflows on Monday and Tuesday alone.
Concerns about the virus’ lingering economic effects, along with growing fears of a controversial US presidential election, are leading some investors to reduce their exposure to some of the riskiest companies in the debt markets. This week, President Donald Trump refused to commit to a peaceful transfer of power if he lost on Election Day.
David Norris, head of US credit at TwentyFour Asset Management, said the idea of a contested election was “very troubling” and by November 3 he expected “increased volatility”.
Hopes for another economic bailout ahead of the election have also faded in the most recent week, with Republican-Democrat relations in Congress further complicated by the death of Judge Ruth Bader Ginsburg and the upcoming battle for its seat on the Supreme Court.
Several Federal Reserve officials, including President Jay Powell and Vice President Richard Clarida, made it clear this week that the US economic recovery relies largely on increased budget support.
“High yield has stopped working,” said Andrew Brenner, head of international fixed income at National Alliance Securities. “I think people are a little worried they are stepping away from the risk and I expect this to continue.”
The average yield on bad U.S. bonds rose more than half a percentage point in September to 5.83% on Wednesday, the highest level in two months, according to an index managed by Ice Data Services. It pushed yields into negative territory this month, down 1.26% so far in September, marking the first month of negative returns since March.
The market had been supported by credit support from the Fed, which since May has been buying corporate bonds, including high yield exchange-traded funds. It has also entered the municipal and government debt markets.
High yield bond issuance increased during this period, as companies took advantage of surging investor demand to take on new borrowing to help them weather the pandemic.
But reflecting weaker investor demand, issuance slowed this week and only six companies tapped into the market, raising $ 3.6 billion, according to data from Refinitiv. That’s a far cry from the more than $ 18 billion raised by 25 companies last week.