March 16, 2017 / 9:40 PM / 2 years ago

Investors pull most cash from U.S. junk bond funds since 2014

NEW YORK (Reuters) - Investors recoiled from debt issued by low-rated companies during the latest week, pulling the most cash since August 2014 from U.S.-based, high-yield bond funds, Lipper data showed on Thursday.

The junk bond funds recorded $5.7 billion in withdrawals, Lipper said, while taxable-bond funds overall posted their first net cash outflows of the year, the research service’s data showed for the seven days through March 15.

The withdrawals from high-yield bonds come after a streak of overwhelming popularity for bond funds despite a continuing rally in U.S. stocks. Stock funds posted $72 billion in withdrawals last year, while bonds attracted $190 billion, according to ICI, a trade group.

Mohamed El-Erian, chief economic adviser at Allianz SE, said investors might be looking to de-risk from the junk bond sector, given the backdrop of interest-rate increases this year.

“The low-credit quality names that have been overly boosted by the general tide of higher risk-taking and the stretch for yield,” should now be sold off or avoided, El-Erian told Reuters.

On Wednesday, the Federal Reserve raised interest rates for the second time in three months, a move spurred by steady economic growth, strong job gains and confidence that inflation is rising to the central bank’s target.

However, the Fed’s policy-setting committee did not flag any plan to accelerate the pace of monetary tightening - which many investors had expected and resulted in short-term relief rally in Treasuries.

“People were really fearful of the FOMC,” said Tom Roseen, head of research services for Thomson Reuters Lipper, referring to the Fed’s policymaking Federal Open Market Committee.

During the latest week, a number of fixed-income fund categories saw inflows, including investment-grade credit, Treasuries and emerging market bonds.

Roseen said high-yield corporate bonds offer a slimmer premium, or spread, over the yield of low-risk bonds after a streak of strong performance starting last year.

“Spreads are going to have to widen a bit more for corporate high-yield to be attractive,” he said.

Taxable-bond mutual funds posted $3.9 billion in withdrawals, while investors pulled $1.1 billion from their ETF counterparts. Mutual funds are seen to represent retail investors’ moves, while ETFs reflect a range of investors, including institutions such as hedge funds.

Stock funds attracted $890 million as inflows into products focused domestically were offset by net withdrawals from international equities funds. Before the latest week, non-domestic stock funds had seen nine straight weeks of inflows.

U.S.-based funds invested in Japanese stocks posted $429 million in withdrawals, their largest outflows since July.

Healthcare and biotech sector funds posted $214 million in outflows, their largest withdrawals since January. Real estate sector funds posted their largest withdrawals since December, $422 million.

The following is a broad breakdown of the flows for the week, including mutual funds and exchange-traded funds:

Sector Flow Chg % Assets Assets Count

($blns) ($blns)

All Equity Funds 0.890 0.02 5,793.858 11,759

-Domestic Equities 2.979 0.07 4,149.020 8,401

-Non-Domestic Equities -2.089 -0.13 1,644.837 3,358

All Taxable Bond Funds -5.040 -0.21 2,357.364 5,931

All Money Market Funds -10.719 -0.46 2,307.900 1,030

All Municipal Bond Funds -0.118 -0.03 370.314 1,408

Reporting by Trevor Hunnicutt; Editing by Jennifer Ablan, Bernard Orr

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