Friday, July 12, 2013

HY outflows hit record. Outperformance narrowing

An investment in the S&P500-indexed portfolio right before the financial crisis and held through today would certainly outperform an investment into junk bonds, right? Wrong. The chart below shows the returns of two major HY ETFs (blue and orange) and the largest S&P500 ETF (red). Since the end of 2008, junk bonds have consistently outperformed. As one HY trader pointed out "all of you stock pickers were in the wrong asset class".

Total returns (source: Ycharts; click to enlarge)

But now, with interest rates on the rise and fixed income markets out of favor, that gap has been narrowing. Relative to other fixed income products junk bonds have held up quite well - so far (see post). What worries some HY investors is that junk bond pricing is very dependent on fund flows. Equities are also impacted by money moving in and out of ETFs and mutual funds, but not nearly to the same extent as corporate bonds. And the recent trend in HY bond flows is alarming. The outflows hit an annual record recently.

Source: JPMorgan

It remains to be seen when and if equities ultimately catch up to HY bonds. But if these outflows continue, it won't take long.
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