The latest sign of bullishness came Thursday as data from Refinitiv Lipper showed that investors poured $5.7 billion into funds that buy junk bonds, the fourth-largest inflow on record.
Investment-grade debt has benefited as well from the Fed’s promise of support. Investors plowed a record $9.9 billion into investment-grade debt vehicles in the week that ended Wednesday, Refinitiv Lipper data show. Including funds that invest in high-yield bonds and loans, inflows were a record $15.6 billion, beating the previous peak of $13.8 billion just a week ago.
While the Fed hasn’t purchase individual bonds, it revealed last week that it had bought some $1.3 billion of exchange-traded funds, including $223 million of high-yield bond ETFs. In doing so, it became an indirect owner in such heavily indebted companies as Chesapeake Energy Corp., Sinclair Broadcast Group Inc.’s regional sports networks and Golden Nugget, the casino business of billionaire Tilman Fertitta.
Even some companies that have filed for bankruptcy, including retailer J.C. Penney Co., are part of the mix. Triple C-rated bonds, the riskiest tier of junk, have outperformed investment-grade debt, returning about 18% through Thursday since the Fed’s intervention on March 23, compared to 14.5% for high-grade corporates.
“Despite only modest actual purchases by the Fed, the actual market reaction has been unquestionably strong. Investors are treating the Fed’s new put in corporate credit as a game changer,” Bank of America Corp. strategists Oleg Melentyev and Eric Yu wrote in a report Friday. They expect Fed corporate bond purchases to stay minimal “in light of overheating market conditions.”
Some of the debt the ETFs hold doesn’t pass muster for the Fed to buy individually. The central bank’s bond-buying program restricts it from holding insolvent companies, for example, and securities issued by non-U.S. firms. The limitations have some investors questioning whether the Fed’s influence could have its limits.
While the U.S. high-yield bond market totals more than $1.3 trillion, the two largest ETFs that reference the market, the iShares iBoxx High Yield Corporate Bond ETF and SPDR Bloomberg Barclays High Yield Bond ETF, hold just $40 billion of assets.
“We’re super frothy right now in credit,” said Greg Staples, head of fixed income at DWS Investment Management. “The question is, what cracks this?”
Staples thinks the rally could cool if the Fed ultimately doesn’t end up buying many individual bonds. But he’s bullish on the prospects for investment-grade and high-yield corporate debt for now, more as a result of the potential for central bank buying than his belief in the strength of company earnings.
The last time that money flowed out of the junk-bond market came just as the Fed announced it would start buying corporate debt.
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