Don't Blame Junk-Bond Buyers for Confusion with Messy Fed Talk

Janet Yellen, chair of the U.S. Federal Reserve, during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., on June 17, 2015.

Janet Yellen, chair of the U.S. Federal Reserve, during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., on June 17, 2015.

Photographer: Andrew Harrer/Bloomberg

The hint that Federal Reserve stimulus will last just a little longer is enough for investors to go back into risky debt.

Even though investors know the punch bowl will soon be taken away, when U.S. central bankers signaled Wednesday that they won’t raise interest rates as quickly as they previously thought, traders piled into high-yield and emerging-market bonds.

BlackRock Inc.’s $14 billion junk-debt exchange-traded fund, the biggest of its kind, reported a one-day inflow of $294 million on Thursday, the day after the Fed’s meeting. And investors deposited about $22 million into iShares J.P. Morgan USD Emerging Markets Bond ETF.

This is a reversal of the prior week through Wednesday, when investors yanked $2.9 billion from U.S. high-yield bond funds, following $2.6 billion the week before, according to Lipper.

The take away here? Get ready for a rocky road ahead, with investors whipsawing between wanting to pile into risky stuff and pile out of it as they adjust their expectations for central-bank policies.

“It’s going to be a little messy,” Richard Clarida, global strategic adviser at Pacific Investment Management Co., said in a Bloomberg Television interview Thursday. “We need to get to used to this.”

Fed Chair Janet Yellen wants to keep the U.S. economy on an improving trajectory, while also weaning the market from stimulus. On Wednesday, the Fed cut its estimate for rates at the end of 2016 to 1.625 percent from 1.875 percent in their March forecast.

She wants to avoid fueling asset bubbles -- yet when she holds off on tightening, investors are emboldened to add to their more speculative wagers. And who can blame them, after all.

For more, read this QuickTake: The Fed's Countdown

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