It’s been a wild ride for corporate credit in 2020.
“To hell and back again” might be an apt description. March brought a brush with the existential, as the pandemic threatened to expose America’s grossly over-leveraged corporate sector, triggering the dreaded “BBB apocalypse” in the process. Outflows from corporate credit funds piled up, spreads ballooned wider, and risk assets shuddered the world over.
Then, the gods on Mount Olympus saw fit to intervene. On the heels of the Fed’s decision to backstop the corporate bond market, outflows turned to inflows, spread widening was quickly reversed, and both investment grade and high yield borrowers tapped the primary market for record hauls.
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Now, the dust has settled. High yield is coming off a blockbuster quarterly performance, and it appears some market participants are content to take profits.
Junk returned an outstanding 10% in the second quarter, the most in more than a decade. Staring down a daunting menu of potential risk-off catalysts in the second half, some folks are apparently de-risking in junk funds, which saw $5.5 billion in outflows last week on Lipper’s data.
That is the fourth-largest weekly outflow on record.
Notably, 2020 has featured a number of the best and worst weeks for junk flows. This “feast or famine” dynamic underscores how manic this year has been and also the power of the Fed put.
Meanwhile, investment grade funds just took in another $7 billion.
Over the past three weeks, the Fed began buying individual corporate bonds and also officially launched its primary corporate credit facility. This has further emboldened investors in blue-chip corporate debt.
On EPFR’s data, IG funds enjoyed their 13th week of inflows ($12.3 billion), while the exodus from high yield was $3 billion.
Perhaps (perhaps) more notable than any of this was the largest outflow from money market funds since December of 2019, which BofA says clocked in at $28.8 billion.
ICI reported a $27.7 billion outflow for the week ended July 1.
Remember, the “cash on the sidelines” story is a big part of the bull thesis. When money market balances are run down, it ostensibly suggests cash is getting put to more productive uses in the market.
If that was the case last week, it was confined to IG credit, government/Treasury bonds, and gold. EPFR data shows equity outflows of $7.1 billion over the period.
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