Meanwhile, In Credit: More Records

Week after week, it’s the same story: investors’ appetite for corporate credit is insatiable.

Although equities grabbed most of the headlines over the past several sessions, it’s worth noting that inflows into investment grade bond funds and ETFs just hit a fresh record, totaling nearly $15 billion in the week through September 2. That eclipsed the previous mark of $14.88 billion logged earlier this summer.

Lipper data showed high-grade funds taking in $10.7 billion over the period. It was the 21st consecutive haul, and brings the total since mid-April to nearly $137 billion.

The uninterrupted inflows are in no small part a response to the Fed’s unprecedented backstop, unveiled in late March when corporate America found itself staring into the abyss amid the panic. Investors quickly seized on the opportunity to front-run Jerome Powell’s buying, and now seem content to invest alongside the Fed, confident that policymakers won’t chance another selloff.

Next week is expected to see a deluge of new corporate supply. September’s IG slate comes on the heels of a record-shattering year for high-grade issuance. Blue-chip US borrowers took advantage of the favorable conditions created by the Fed’s inaugural foray into corporate credit to borrow nearly $1.5 trillion in the first eight months of the year.

As noted earlier Saturday, August ended up seeing nearly $140 billion in new sales, well more than dealers expected. September should be good for another $140 (give or take).

In a testament to demand, the slowdown in primary market activity over the past week found offerings from Mondelez, W.R. Berkley, and Host Hotels (among others) massively oversubscribed.

Meanwhile, cash continues to come off the sidelines. Total assets in US money market funds dropped for a fourth week, ICI said.

$45.2 billion fled “cash” in the week through Wednesday. It was the second-largest outflow of 2020, trailing only tax week (recall that the Trump administration extended the tax deadline in the US by three months from mid-April to mid-July).

The breakdown showed government funds shedding $38.9 billion. As noted here on multiple occasions over the summer, this cash isn’t going into equities, or at least not into equity funds. The largest stock ETF (i.e., SPY) saw five straight months of outflows through August, for example.

It’s safe to say some of this “dry powder” has found its way into corporate credit, although I suppose you might also suggest a portion (that belonging to younger investors) is being put to “work” in Robinhood accounts and/or burned up as premium — one OTM tech lottery ticket at a time.


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6 thoughts on “Meanwhile, In Credit: More Records

  1. I just do not get the risk reward in credit. Tight spreads, low absolute and risk free rates.

    Where is the real upside? Tighter spreads based on demand (could be fickle) or improved credit (cash flow). So probably need pricing power, op leverage, market share gains, better economy, equity sales/de-lever.

    Downside? Deflation, slow economy, inflation causing risk free rates to rise, corp fundamentals weakening, etc.

    So make 2-6% vs st and potential long term losses (defaults)?

    What is the opportunity cost of holding cash really vs credit or even owning many stocks?

    I get it for insurance cos but for most investors why take the risk? To quote Jim Grant it seems like return free risk to me.

    We’ll be taliking about credit market issues 12-18 months from now I suspect.

    I just don’t get the flows nowadays…………..

    1. I don’t necessarily disagree with you but to play devil’s advocate, what else is there? Treasuries are negative considering inflation and short-term rates aren’t going anywhere. The stock market, despite the gains of the last 5-6 months, seems decoupled from the economy. IF you think the Fed is going to backstop credit regardless of what happens, then aren’t corporate bonds similar to Treasuries except actually giving investors a real return? And there is upside in these bonds as well if you believe negative rates are in the Fed’s future.

      I think there is a higher “blow-up” possibility here than what is being priced in. And to your point, I am somewhat surprised that high-dividend stocks that rain cash aren’t doing better in this market given the situation as a whole.

  2. I guess i don’t understand how these bond funds work. Over the last month the investment grade bond fund LQD has gone down while this article says everyone is flocking to investment grade bonds….so what gives?

    1. Interestingly if you look at the actual bond funds rather than the etf’s they have gone up over the last couple of weeks. It seems like the volatility impacts the etfs more than the bond funds.

  3. That is my experience as well. Many of Vanguard’s bond funds have returns well above nominal rates for the year. Many are active funds and contain seasoned bonds. My bond holdings still contain UST bonds paying 7% or more. These holdings add some trading options typical ETFs don’t have.

  4. LQD – minimal carry, is better than the alternatives—think barbell–why UST? why HYG? LQD also might be argued that it offers diversifying in a risk off, not from a return perspective but from a risk perspective—say SPX sells off by 30%, you can be safe in assuming that LQD is unlikely to sell off that much even if it does have record high duration

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