Half a trillion. Give or take.
That’s how much investment grade credit funds are on track to take in this year.
IG bond funds have enjoyed inflows for 28 consecutive weeks. So, seven months of uninterrupted AUM growth.
As the figure above (from BofA, tallying EPFR data) shows, the pace has decelerated of late, but $7 billion (the influx this week) is plenty healthy.
At the current clip, high grade funds would rake in nearly $440 billion in 2024, a record. And by a mile. The next closest years (2021, 2020 and 2019) are around $250 billion.
This is set against a remarkable supply backdrop. Simply put: The primary market’s booming. This week alone, IG borrowers sold $56 billion in bonds.
US high grade supply YTD was $692 billion through Friday. As the figure above shows, that’s the briskest to-May pace since 2020, when the Fed was explicitly backstopping the US corporate credit market.
The $53 billion sold through mid-week counted as the largest three-day supply deluge since 2021. This was the third heaviest week of 2024 behind only the first week of the year and the week ending February 23, BMO’s Daniel Krieter noted.
Although Krieter was reluctant to raise his supply forecast for the full-year, the math proved difficult to ignore. “After the very strong start to May, let’s assume that actual supply for the month comes in $10 billion above expectations at $140 billion — that would yield IG supply of $790 billion at the end of May,” he wrote in a Friday note. “From there, just using the 2016-2023 monthly average for the remaining seven months of the year (excluding 2020) would result in total 2024 IG supply of $1.42 trillion.”
Spreads are eye-wateringly tight inside of 90bps. As the annotated figure on the right (below, from BofA’s Hartnett) makes clear, that’s the stuff of booms and bubbles.
The figure on the left speaks for itself. The outperformance to beleaguered Treasurys is unprecedented.
“Since March of 2020 [IG credit] outperformance versus government bonds [is the most pronounced] in 100 years,” Hartnett went on.
He offered a cautionary corollary: If “govies start outperforming credit, risk assets will look toppy.”
Spread duration is critical. If you are buying in less than 5 years your risk is pretty marginal vs. Us treasury bonds if you are going blue chips. If you buy 4 year paper, in 18 months you are looking at 2 year paper. Even if the spread widens 50 you are not at much risk since you had the yield pick up first and the widening won’t mean much. The market is telling you that it anticipates a relatively soft landing.
The same is not the case for stonks.
The last time I looked at 4-5 year bonds, agencies were competitive with IG corporate and, for taxable accounts, sometimes superior depending on state tax rate. But that was a month ago.
I mean the tax exempt agencies.
The IG/Junk spread is also near historical lows. Yet another reason Fed is so reluctant to hike.