NEW YORK (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
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
All Taxable Bond -4.850 -0.27 1,805.071 5,559
All Money Market 7.842 0.35 2,279.794 1,309
All Municipal Bond 0.017 0.01 294.908 1,428
Reporting by Sam Forgione; Editing by Leslie Adler and Steve Orlofsky