- By Region
Global investors hungry for higher-yielding assets are flooding into US mutual and exchange traded funds that bet on riskier debt, pushing flow volumes so far this year to their highest on record.
Inflows into US-domiciled high-yield mutual funds and ETFs wrapped up a three-month run in August to reach $32bn, according to EPFR Global.
The amount is more than double the inflows such funds experienced in the same period of 2011 and the highest since EPFR started to track the data.
Inflows accelerated in the past couple of weeks as global companies, including General Motors Financial, Sprint Nextel and First Data Corp sold roughly $30bn in junk debt in August, a record for the month.
The month was also strong for sales by global companies with higher credit quality such as Rio Tinto and Siemens, which sold over $101bn in debt in the past four weeks, according to Dealogic, the data provider.
The borrowers rushed to sell the bonds before a slowdown in capital markets activity ahead of the US Labor Day holiday and as a slew of data and central bank meetings in Europe and the US loomed.
While any disappointment with global policy makers’ efforts to boost growth and address a crisis in the eurozone could shut the debt issuance window, Wall Street analysts still estimate an additional $100bn in investment-grade and $30bn in high-yield sales after Labor Day on September 3.
“If the Fed delivers a QE3 programme and the ECB does not disappoint in its explanation of its proposed bond-buying programme, then the planets would align for another very active month,” said Adrian Miller, a director for global market strategy at GMP Securities.
The massive sales have been met with strong demand among investors, lured by their higher returns.
US junk-rated debt, for example, has generated an average return of more than 10 per cent this year compared with 2 per cent on US Treasuries and 7.5 per cent on investment-grade bonds, according to Barclays.
In Europe, risk appetite has been stoked in recent weeks by Mario Draghi, the European Central Bank president, who announced in late July that the central bank was willing to do “whatever it takes” to support the euro.
Investors have since been looking forward to next week’s ECB meeting where most expect it to reveal details of a revamped bond-buying programme.
European companies issued $20bn worth of debt in August, the highest on record and more than double the $8bn worth normally issued over the month, according to Dealogic data going back to 1995.
“There has been a lot of opportunistic financing in the last few weeks,” said Steve Hussey at AllianceBernstein.
“However, people are expecting the rest of the year to be more volatile and perhaps less conducive for issuance, ahead of various EU summits and elections in Europe and the US.”