In what looks like more evidence that September’s equity market tumult is spilling over into high yield, outflows from junk funds were $4.22 billion in the week through Wednesday, the latest Lipper data showed.
That is the biggest outflow since early July, and ranks among the largest ever on a quick scan.
While the Fed is backstopping fallen angels and buying “small” quantities of high yield ETFs as part of its emergency corporate credit program, the fragility of the economic recovery (as underscored by Fed officials themselves this week) has some market participants concerned about the future.
While there’s certainly no sign of anything that even approximates “panic”, cracks may be starting to show. Aethon United yanked a $700 million offering on Wednesday, for example. It was the first deal pulled since July.
High yield spreads ballooned wider earlier this week as stocks fell, and investors have recently pulled large sums from the most popular junk ETF.
Even so, issuance remains robust. In fact, this month was the seventh busiest on record coming into Thursday, with September boasting more than $40 billion in supply (and counting).
Wednesday’s deals took total volume for 2020 to almost $330 billion. That is the most ever. The old record was set in 2012.
“In the early days of the COVID-19 pandemic, companies struggling with sharp declines in revenue used proceeds from most bond offerings to boost liquidity”, Bloomberg’s Gowri Gurumurthy wrote Wedensday, on the way to noting that currently, “a refinancing boom dominates the market” with corporate management teams leaping at the opportunity to secure lowering borrowing costs.
For investors, it’s the paucity of yield and the comfort of the Fed backstop that’s boosting demand. Or at least it was boosting demand.
These dynamics have manifested themselves in the investment grade market as well. IG issuance set a record in 2020 and inflows into blue-chip credit funds remain uninterrupted.
Investors put another $4.16 billion into high-grade funds last week, Lipper said Thursday. For the first time in months, the inflow into IG wasn’t enough to offset the outflow from high yield.
