Investors have poured almost $16bn in to US corporate bond funds this month, underscoring how signs of easing inflation have helped brighten sentiment after a brutal sell-off in much of 2022.
Funds holding high-grade bonds have garnered $8.6bn of new client money in the month to November 23, while those focused on riskier junk-rated debt have posted net inflows of $7.1bn. The combined figure is set to be the highest monthly inflow since July 2020 if the trend holds in the final week of November, according to data provider EPFR.
The surge of inflows into credit funds comes as Wall Street markets have staged a late-year rally after data released earlier in November showed the pace of consumer price growth has started to ease, prompting hopes that the Federal Reserve may soon slow down its aggressive rate rises.
Almost $5bn had flowed into US corporate bond funds before the release of the consumer price index report on November 10, but a further $10.9bn shifted into the vehicles in the fortnight that followed, EPFR data show. Corporate bonds have also rallied following the inflation report, with an Ice Data Services index tracking high-grade debt up 4.6 per cent, trimming the 2022 fall to about 15 per cent.
Many companies took advantage of cheap money during the stimulus-infused depths of the pandemic to refinance and issue new debt. However, the Fed has since led the charge on tightening monetary policy to curb inflation — taking US interest rates from near zero to a target range of 3.75 to 4 per cent. In turn, concerns have intensified that the central bank and its peers will twist the screws into a recession, crimping consumer spending just as businesses face much higher borrowing costs.
The CPI report, which showed the annual rate of inflated cooled to 7.7 per cent in October from a high of 9.1 per cent in June, has helped to provide at least a glimmer of hope that rate rises may start to slow. Markets are pricing in bets that US interest rates will peak at 5 per cent next June before starting to fall, having previously registered as high as 5.3 per cent.
“I think the investors are saying . . . ‘rates are going down rather than up, so I want to be in sooner rather than later,” said Marty Fridson, chief investment officer at Lehmann Livian Fridson Advisors.
Fridson said some investors may be keen to lock in higher yields after this year’s sell-off sent them soaring. The average yield on the Ice index of high-grade corporate bonds is 5.4 per cent, down from an October peak of more than 6 per cent, but well above the 2.4 per cent from the end of 2021.
Still, November’s upbeat fund flow data are a drop in the ocean of exits from risky US corporate bond vehicles since early January. Almost $52bn has leaked out of high-yield funds so far in 2022. Tempered by net inflows for high-grade debt, overall outflows stand at $44bn year to date.
Cameron Brandt, research director at EPFR, cautioned that “there’s a fairly high degree of irrational optimism generated by the still rather uncomfortable number for US inflation in October”.
“There’s a pool of investors who have been trudging through a yield-starved environment for the better part of a decade,” he added.