Investors pull in $15.8 billion from U.S. junk bond funds to start year, worst outflows since 2010: Goldman Sachs

Funds specializing in US high-yield bonds or “junk bonds” had their worst outflows to start a year since 2010, according to a tally by Goldman Sachs research.

With an additional $3.5 billion in weekly outflows through Thursday, investors have withdrawn a total of $15.8 billion from U.S. junk bond funds year-to-date, the most on the same period in a dozen years, according to Goldman.

“In the USD and EUR markets, the composition of fund flows continues to show strong aversion to HY bonds,” wrote Goldman’s credit research team led by Lotfi Karoui, in a weekly client note.

The rebuke to junk bond funds and other risky assets comes as the Federal Reserve prepares to tackle inflation set at 40-year highs, first by raising short-term rates for the first time since 2018, then starting to cut its near $9. trillion balance sheet.

European high-yield bond funds recorded $1.5 billion in weekly outflows, considered by Goldman analysts to be the largest on record.

Sentiment deepened further on Friday after White House national security adviser Jake Sullivan said Moscow was able to mount “major military action” in Ukraine and an invasion could begin “from ‘one day to another’.

The Dow Jones Industrial Average DJIA was down about 500 points when last checked Friday afternoon, or 1.5%, while the S&P 500 SPX index was down 2% and the Nasdaq Composite Index COMP was down. down 2.8%. US stocks were also heading for weekly losses.

Credit investors often sell ETFs first to get cash when markets get choppy. The iShares iBoxx $ High Yield Corporate Bond ETF, HYG,
-0.35%
the largest U.S. junk bond exchange-traded fund in the industry, was down just 0.3% on Friday, when last checked, but down 4.9% on the year, according to FactSet.

Extractions this year from US junk funds represent the equivalent of a loss of 3.8% of the sector’s assets under management since the start of 2022, according to Karoui’s team.

The prospect of the “Fed moving from its multi-year campaign of ‘accommodative’ monetary policy to one of monetary policy tightening sent markets into a tailspin to start the year,” Brian Zinser of Mizuho Securities, strategist in head of corporate bonds, and his team wrote, in a client note Thursday.

Mizuho’s team plotted, by asset class, the wall of negative total returns since the beginning of the year, showing that few sectors of the financial markets were in positive territory until February 9:

US high yield total return down 3.1% on the year, but much worse for other assets

Mizuho Titles

“Investor sentiment has changed dramatically as inflation data and Fed commentary have caused markets to reassess risk across all asset classes,” the team said, adding that the rise in 10-year Treasury yields TMUBMUSD10Y,
1.935%,
used to assess everything from commercial real estate loans to corporate bonds, this year has added to “a deep hole” for corporate credit yields.

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