Stock Asset Outflows Near Highs, High Yield Follows

Asset outflows from high yield debt are moving along near record clips, with stock market outflows also at notable levels, according to a Bank of America Merrill Lynch report. The report comes on the heels of a Goldman Sachs report which extolled investors not to worry about high-yield debt concerns.

Stock asset outflows turn “sharply negative

With stocks nearing to top end of a price range, U.S. mutual fund and ETF asset outflows “turned sharply negative” for the week ending May 4, BAML’s Yuriy Shchuchinov.

After notching the second straight losing week in a row, and seeing the VIX flirt with the 16 level, asset outflows from stocks totaled $15.14 billion, reversing last week’s modest $1.29 billion inflow, according to the BAML Situation Room report. Investors were reported moving into “safe” assets such as cash, U.S. government debt and gold.

The BAML report, for its part, noted inflows to high grade debt such as government bonds remained strong despite falling marginally week over week. Assets flows fell to $2.76 billion from $3.09 billion. The decline was due to both an acceleration of outflows from short-term funds to $0.23 billion from $0.14 billion and a decline in flows outside of short-term funds to $2.99 billion from $3.23 billion, the report pointed out, noting both high grade funds and ETFs continue to report strong inflows.

“All you can take away from [the flows] is that there is a chronic negative tilt,” Jim Paulsen, chief investment strategist at Wells Capital Management told the Financial Times. “Pessimism really didn’t get extinguished by this rally.”

There have been a host of concerns, with many models pointing to potential volatility coming into the spring as Greek debt issues which were previously papered over coming to the fore as well as other issues.

“Among the headwinds they are facing are fears that Greece and its creditors are edging closer to another bout of brinkmanship, the recent erosion of the euro’s competitiveness versus the US dollar, questions about the strength of the German economy and the looming referendum on EU membership scheduled for the end of next month,” Cameron Brandt, director of research at EPFR, told the Financial Times.

High yield debt sees same negative tone, but don’t worry, be happy

The same “negative” flows that are seen in stocks are also evident in high yield debt, but with a caveat.

“Although high yield flows turned to a $2.34 billion outflow, most of it was driven by just one ETF,” BAML’s Shchuchinov noted. High yield investments reported a modest $0.23 billion inflow the week before.

Goldman Sachs, for its part, said yesterday that thought it unlikely that high-yield defaults will increase to recession-like levels, which would require the US economy fall into a recession. The level of corporate defaults are typically correlated to the business cycle, the report noted. As the US economy is still growing, the investment bank said it is unlikely the number of default will rise outside a few areas of concern in Metals, Materials, and Energy sectors.

While high yield was negative, leveraged loan funds turned positive for the first time in seven weeks, BAML noted, notching a modest $0.26 inflow coming off an even smaller $0.03 billion outflow the previous week.

Inflows to emerging market bonds, which fall under very different performance drivers, saw improved asset flows, up to $1.16 billion from $0.34 billion. Inflows to municipal offerings continued with a modest positive tilt of $0.96 billion following a $1.28 billion the week previous.

“The outflow from high yield thus drove the weekly drop in inflows to the all fixed income category to $1.83 billion from $4.04 billion,” the report observed. Money market funds, meanwhile, posted a $2.31 billion outflow, down from a $5.65 billion inflow in the prior week.