Investors worldwide cut back on commitments to high-yield "junk" bond funds in the latest week, giving just $100 million to the funds globally after committing over $1 billion the prior week, according to Bank of America Merrill Lynch.
The sharp drop in demand in the week ended May 15 came amid record-high prices on the debt. The Barclays U.S. Corporate High Yield Index hit a record low yield-to-worst of 4.97 percent on May 7. Falling yields indicate higher prices. Yield-to-worst indicates the lowest potential yield on a bond without the issuer defaulting.
In particular, funds based in the United States that hold "junk" bonds took a hit with outflows of $400 million, their second highest outflow of the year according to Bank of America Merrill Lynch, citing figures from fund-tracking firm EPFR Global. Funds that hold "junk" debt based outside of the U.S., meanwhile, recouped those losses with inflows of $500 million.
The rally in high-yield debt has room to continue in light of low interest rates from the Federal Reserve's monetary stimulus, said George Rusnak, national director of fixed income for Wells Fargo Private Bank, which has $170 billion in assets.
"There's no free lunch in the bond market. You have to take some kind of risk," Rusnak said.
The Federal Reserve is buying $85 billion in Treasuries and agency mortgage securities per month in an effort to spark a U.S. economic recovery and drive down unemployment.
Investors who pulled cash out of high-yield bond funds acted opportunistically, as U.S.-based exchange-traded funds that hold the debt suffered outflows of $533 million. Actively managed high-yield mutual funds based in the U.S., meanwhile, got $136 million in new cash.
Investors opted for funds based in the U.S. that hold investment-grade corporate bonds, which offer higher-quality ratings than their "junk" counterparts, and committed $1.4 billion. That amount was still down from inflows of $3 billion the prior week, however.
Funds based around the world that hold emerging market bonds collected $870 million in new cash, also down from the prior week's inflows of $1.9 billion. Emerging market stock funds, meanwhile, had bigger inflows of $1.4 billion, or the most since February according to EPFR Global.
Mutual funds and ETFs that hold leveraged loans, which are protected from rising interest rates by being pegged to floating-rate benchmarks, had inflows of $870 million. That is down slightly from inflows of over $1 billion the prior week.
Funds that hold Japanese stocks raked in $6.79 billion in new cash from investors worldwide, the highest on weekly record according to the Cambridge, Massachusetts-based EPFR Global.
Japan's Nikkei average broke above 15,000 for the first time since January 2008 on Wednesday. The index has surged 45 percent this year, boosted by the Bank of Japan's announcement on April 4 that it would inject $1.4 trillion into the nation's economy in less than two years to fight deflation.
Stock funds worldwide pulled in $14.16 billion in inflows over the week as the S&P 500 rallied, led by gains in the prices of large-capitalization stocks such as Google, Bank of America and Citigroup. The MSCI all-country world equity index also rose about 0.3 percent over the period.
Demand for stock funds were more than quadruple the demand for bond funds over the week. Bond funds worldwide attracted $3.4 billion in new cash from investors globally after gaining a record $13.07 billion the previous week. Equity funds have pulled in $176.36 billion so far this year, while bond funds have attracted $165.1 billion, EPFR Global said.
Investors who are weary of low yields on bonds are being pushed into stocks since there is "not much other choice," said Alan Lancz, president of investment advisory firm Alan B. Lancz & Associates Inc.
Mutual funds and ETFs that hold U.S. stocks attracted $3.29 billion in new cash in the latest week as the benchmark S&P 500 index hit new record highs. The index rose 1.6 percent over the weekly reporting period. Those inflows were less than half of the prior week's cash gains of $7.42 billion, however, according to EPFR Global.
(Reporting by Sam Forgione; Editing by Diane Craft and Chizu Nomiyama)