On issues of debt and creditworthiness, the credit markets usually “get it” before the stock market does, and certainly did so in 2008. From Wolf Richter at wolfstreet.com:
First things first: Investor desperation for yield, any discernible yield no matter what the risks, and blind confidence that all this will work out somehow are waning.
Now questions pop up here and there, and investors are beginning to open their eyes just a tad amid waves of defaults and bankruptcies, after years of worriless fixed-income bliss during which cheap new money made investors forgive and forget all sins of the past. But now investors are pulling big chunks of money out.
For the week ended June 17, investors yanked “a whopping” $2.9 billion out of junk bond funds, according to S&P Capital IQ/ LCD’s HighYieldBond.com, on top of the $2.6 billion they’d yanked out in the prior week. Those redemptions dragged down the year-to-date inflows to $3.6 billion, nearly 40% below last year at this time. But $201.5 billion remain in those funds.
Leveraged-loan funds have been plagued by outflows as investors have been warned for a couple of years about their risks. Banks extend high-risk loans to over-indebted, junk-rated companies but don’t want to keep these iffy loans on their books. So they sell them to loan funds or repackage them into CLOs and then sell them. Even the Fed has gotten concerned. This week brought more of the same, with $311 million leaving leveraged-loan funds, bringing year-to-date outflows to $3.6 billion. Total fund assets are now down to $94 billion.
On the investment-grade side, it didn’t look pretty either. Business Insider cited Bank of America Merrill Lynch strategists: “High grade credit funds suffered their biggest outflow this year, and double the previous week.” The biggest outflows since the Taper Tantrum in June 2013. There was more doom and gloom:
However, government bond funds suffered the most amid the recent spike in volatility, with outflows surging to the highest weekly number on record ($2.7bn). This brings the total outflow from fixed income funds to almost $6bn over the last week, the highest since the Taper Tantrum and the third highest outflow ever.”
Why the sudden bouts [of] caution?
The Fed? Maybe not. The Fed’s cacophony about raising rates keeps pushing that point further out into the future. Voices are clamoring for many more years of easy money, and some promote the idea that rates should never rise, or could never rise, in any significant manner, or to what might have been considered more normal levels a decade ago, because, after six years of these ingenious easy-money polices, businesses, governments, and consumers have taken on so much debt that higher rates would bankrupt them.
Besides, when or if the Fed finally has what it takes to raise the rates, it would go from nothing to nearly nothing very slowly, as Fed gurus explain relentlessly. So not all that much to be spooked about.
Or could the public anxieties about liquidity have spooked investors into selling their bond funds? The idea would be to sell while there is still liquidity. When the real selling starts, liquidity dries up, and then it’s too late. Once prices have dropped enough, liquidity magically returns. Not a promising thought for investors sitting on a ton of bonds.
But there is another reason: a nerve-wracking wave of corporate defaults and bankruptcies. And not all are in the energy sector.
To continue reading: Wave of Defaults, Bankruptcies Spook Bond Investors
http://wolfstreet.com/2015/06/19/wave-of-defaults-bankruptcies-spook-bond-investors/
