High-Yield Funds Post Record $4.8 Billion Outflow, BofA Says

U.S. high-yield funds recorded their biggest outflow on record this week, according to Bank of America Corp., as concern that the Federal Reserve may ease stimulus measures began to take hold.

Investors pulled an unprecedented $4.8 billion from funds that purchase notes sold by companies rated below investment grade, the Charlotte, North Carolina-based bank said in a report yesterday. That was accompanied by outflows from high-grade funds, the first weekly decline this year, even as leveraged loans attracted about $1 billion, bringing this year’s gains to $28.5 billion, a 38 percent increase in assets since the start of the year, Bank of America said.

Returns on junk bonds have been trimmed by 2.4 percent since May 22, when Fed Chairman Ben Bernanke said the central bank could slow the pace of its $85 billion of monthly bond purchases, which have fueled investor demand for higher-yielding assets.

“Investors’ concerns about the effects of Fed tapering on high-yield assets reached a fever pitch this week,” Barclays Plc strategists Jeffrey Meli and Brad Rogoff, wrote in a report today. “This is a reflection of market fears that all risk asset valuations will be weaker when QE ends.”

‘Wide, Wider’

Prices of leveraged loans have dropped 0.43 cent this week to 97.89 cents on the dollar, the biggest weekly decline since November, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index. Prices on high-yield bonds slumped 1.51 cents to 103.46 cents on the dollar, Bank of America Merrill Lynch index data show.

Liquidity in high-yield bonds, as well as in emerging markets, has dropped over the last week, as measured by bid-ask spreads, “which are wide, wide, wider,” and the average size of orders, which are “less, less, and less,” according to Bill Gross, manager of the world’s biggest bond fund.

“It’s definitely not business as usual,” Pacific Investment Management Co.’s founder Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Mike McKee. “We’ve noticed a deterioration.”

A typical transaction size has shrunk to $2 million to $3 million, from $5 to $10 million, he said. While investors aren’t necessarily in “panic mode,” there’s evidence they’re selling high-yield exchange-traded funds, Gross said.

Unemployment Rate

Investors redeemed 3.3 million shares, or about $305 million, from BlackRock Inc.’s $14.2 billion iShares iBoxx High Yield Corporate Bond ETF, the biggest of its kind on June 4, its biggest one-day outflow on record.

The unemployment rate climbed from a four-year low to 7.6 percent in May, Labor Department figures showed today in Washington. Payrolls rose 175,000 last month after a revised 149,000 increase in April that was smaller than first estimated, the figures showed.

“The economic data are not strong enough to support such heightened expectations of Fed tapering,” Rogoff and Meli wrote in their report.

Leveraged loans and junk bonds are forms of high-yield, high-risk debt that carry ratings of less than Baa3 by Moody’s Investors Service and below BBB- at Standard & Poor’s.

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