Investors Pour $10.7 Billion Into Junk Bonds as Fears Fade

  • Bond pickers at Pimco, BlackRock high-yield funds led gainers
  • Defaults for U.S. high-yield bonds are rising in April

Investors poured the most money in more than four years into junk-bond debt last month as memories faded of December’s collapse of Third Avenue Management’s mutual fund, which sent tremors through the high-yield credit market.

About $10.7 billion in net inflows streamed into junk funds in March, according to Morningstar Inc., after a rebound in oil prices also helped restore confidence in the debt.

“It seemed it was a big scare at the time,” Morningstar analyst Alina Lamy said in an interview. “Based on the past couple of months, it seems like they forgot about it pretty quickly.”

Plunging oil, gas and coal last year dragged down the high-yield market, allowing investors this year to cherry pick non-energy related credit that had fallen in price but was less vulnerable to default. In February, investors jumped back in, adding about $3.7 billion to high-yield funds. The March inflow was the biggest one-month gain for high-yield debt since $11.1 billion in October 2011, according to Morningstar.

Actively managed junk funds attracted $7.3 billion in March compared with $3.4 billion to passively managed funds. The month’s biggest gainers by new assets were the BlackRock High Yield Portfolio and the Pimco High Yield Fund, Lamy said.

Energy holdings are not among the top six industry sectors in either funds’ portfolio, according to Bloomberg data. The $17.3 billion BlackRock fund is up 3.2 percent this year, while the $9.9 billion Pimco fund has gained 3.9 percent.

The Bank of America Merrill Lynch U.S. High Yield index is up 5.3 percent this year and rose 3.2 percent in the first quarter. It fell 4.6 percent in 2015. 

In the 12 months through March, investors pulled a net $10.6 billion from high-yield funds, including $11.2 billion in December redemptions. That month, Third Avenue froze withdrawals on its $788 million Focused Credit Fund, triggering a selloff in high-yield bonds.

“High-yield flows are volatile,” Lamy said.

The price of a barrel of Brent crude has climbed 57 percent since hitting a 2016 low of $27.88 on Jan. 20. That doesn’t mean junk borrowers are out of the woods.

Defaults for U.S. high-yield bonds topped $14 billion in the first two weeks of April, the largest monthly volume in two years, according to Fitch Ratings. The speculative-grade default rate for the past 12 months is on pace to reach 3.9 percent this month, up from 2.1 percent for the same period a year ago, according to Fitch. Peabody Energy Corp. and Energy XXI Ltd. filed for bankruptcy this week.

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