UPDATE 2-U.S.-based junk bond funds post record $7.1 bln outflows -Lipper

Thu Aug 7, 2014 7:42pm EDT

(Adds details on high-yield returns and investor quotes,
byline)
    By Sam Forgione
    NEW YORK, Aug 7 (Reuters) - Investors pulled a record $7.1
billion from U.S.-based junk bond funds in the latest week and
bailed out of equity exchange-traded funds at the most frantic
pace in six months, Lipper data released on Thursday showed,
offering one of the biggest signals yet of a growing wariness
over risk assets.
    The outflows from junk bond funds, which were the biggest
since Lipper records began in 1992, underscore growing investor
concerns of stretched valuations in the securities after the
sector's multi-year rally.
    Stock funds, whose flows tend to move in tandem with those
of high-yield bond funds, posted $16.4 billion in outflows, the
most since February. Investors pulled $15.8 billion from
U.S.-based stock ETFs, funds often used by institutional
investors.
    "The junk bond market is the very market that went up
farther than others, so this isn't too surprising. The market is
now for sale, but we are still watching the high-yield market
and will be adding opportunistically," said Dan Fuss, vice
chairman of Loomis Sayles.
    The outflow coincided with one of the roughest weeks for the
 junk bond market in years, according to Bank of America/Merrill
Lynch Fixed Income Index data. 
    High-yield bonds delivered a negative total return of 1.42
percent in the week ended Aug. 1, their worst weekly performance
in more than two years. Meanwhile, the yield premium investors
demand for holding these low-rated bonds shot up by 0.50
percentage point to more than 4.2 percentage points above
comparable U.S. Treasury debt. Just over a month ago, that
spread had been as low as 3.35 percentage points, the smallest 
since 2007.
    The average yield-to-maturity on junk debt is 6.24 percent,
more than a full standard deviation below the historic average
of around 9.45 percent, the BofA/Merrill data shows.
    The unusually low yields and high prices for junk bonds had
prompted many observers to speculate that a bubble was forming,
in no small part because of U.S. Federal Reserve policies that
kept interest rates on bonds of all stripes at historic lows. 
    Three rounds of bond-buying by the Fed and an official
policy interest rate near zero for almost six years have forced
investors to look for greater returns among a wide range of
riskier assets, including junk bonds and equities.
    The bet had paid off handsomely, with junk bonds delivering
a total return of 135 percent over the five years through the
end of 2013. Until early July, they had been outperforming
Treasuries by more than 200 basis points, but they are now 
outpacing Treasuries by just 45 basis points.
    Drawn by the opportunity to borrow at such low rates,
low-rated U.S. corporate borrowers have been issuing new debt at
a rapid pace. So far in 2014, U.S. companies have issued $197.4
billion of new junk bonds, 1.7 percent ahead of the 2013 pace,
according to SIFMA data.
    "Investors were fearful that the Fed would accelerate its
time table for raising interest rates," said Martin Fridson,
chief investment officer of wealth management firm Lehmann
Livian Fridson LLC.
    "A lot of money that was in high yield, and perhaps a lot
that is still there, has been there with an awareness that
valuations were not really supported by the fundamentals, but
the Fed was propping things up," he added.
    Investors pulled $4.8 billion from taxable bond funds
overall, the largest net outflow since March. Floating-rate loan
funds, which investors also seek for their higher yields,
reported $1.5 billion in outflows, a three-year high. 
    Emerging market debt funds posted $760 million in outflows,
the first outflows since May. A preference for safety showed in
inflows of $2.2 billion into funds that mainly hold safe-haven
U.S. Treasuries, their biggest since February. 
    Emerging market stock funds, meanwhile, attracted $1.3
billion in new cash, for a sixth straight week of inflows.
    The big outflows from stock and high-yield bond funds
coincided with a drop in the benchmark S&P 500 stock
index on July 31 that was the biggest one-day percentage decline
since April 10.
    "It was a sea of red in the flow charts," said Jeff
Tjornehoj, head of Lipper Americas Research, referring to the
heavy outflows among junk bond funds. 
    He said the BlackRock High Yield Bond Fund was hardest hit
among mutual funds in that category with $649 million in net
withdrawals. The fund, with about $14 billion in assets, has a
year-to-date total return of 4.22 percent, beating 88 percent of
peers, according to Morningstar Inc data. 
    The worst-hit ETF was the iShares iBoxx $ HY Corp Bond ETF
with $594 million in outflows, according to Lipper. 
    The weekly Lipper fund flow data is compiled from reports
issued by U.S.-domiciled mutual funds and exchange-traded funds.
    The following is a broad breakdown of the flows for the week
ended Aug. 6, including exchange-traded funds (in $ billions): 
 Sector                Flow Chg    % Assets  Assets     Count
                       ($Bln)                ($Bln)     
 All Equity Funds      -16.408     -0.39     4,117.654  10,931
 Domestic Equities     -18.474     -0.59     3,035.823  7,963
 Non-Domestic          2.066       0.19      1,081.831  2,968
 Equities                                               
 All Taxable Bond      -4.850      -0.27     1,805.071  5,559
 Funds                                                  
 All Money Market      7.842       0.35      2,279.794  1,309
 Funds                                                  
 All Municipal Bond    0.017       0.01      294.908    1,428
 Funds                                                  
 
 (Reporting by Sam Forgione; Editing by Leslie Adler and Steve
Orlofsky)
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