U.S. junk bond funds saw a record $7.66 billion inflow as investors followed the Fed, which plans to buy the debt. The increase through April 15 is the third straight weekly gain this month, including the prior peak of $7.1 billion on April 1, according to Refinitiv Lipper.
“You can thank the Fed,” said Greg Zappin, a money manager at Penn Mutual Asset Management. “High-yield spreads have tightened about 300 basis points and the market is open to issuance, so I’m not surprised money is flowing in.”
Risk assets have benefited from stimulus programs enacted to shore up the economy as the fallout from the virus continues to wreak havoc. The extra yield investors demand to own junk bonds instead of Treasurys narrowed to 740 basis points as of Wednesday, according to the Bloomberg Barclays U.S. Corporate High-Yield index. Spreads hit 1,100 basis points on March 23, the widest since the 2008 global financial crisis.
Investment-grade funds saw an inflow for the first time since February, taking in $5.8 billion, the Refinitiv Lipper data show. Leveraged loan funds got $30 million, the first net gain since January.
“The investment-grade credit market doesn’t give you many windows of opportunity like we had in March,” said Scott Kimball, a portfolio manager at BMO Global Asset Management. “The asset class was getting too cheap on its own, then the Fed intervention created insatiable demand.”
“Ideally, you would like clients to try not to make really short-term decisions, however this is an unprecedented situation,” an expert says.
The Fed said on April 9 it would move to buy high-yield debt and ETFs as part of a program to support small and mid-sized businesses during the coronavirus crisis. Bonds rated BB-/Ba3 would be eligible as long as they were at least BBB-/Baa3 — the lowest rung of investment grade — on March 22.
“Now that we know we’ve got the Fed explicitly back-stopping investment grade and to a degree the high-yield market, I think there’s going to be a lot more money coming into the spread product and risk assets,” said John McClain, a portfolio manager at Diamond Hill Investment Group. “You’ve got comfort that the guy who’s got more money than the casino is backing this asset class.”
