Markets Brace For More Fund Liquidations As Record Outflows Slam Debt Funds

Among the fixed income community, this week’s most important number, more so than the pre-telegraphed 25 bps increase in the Fed’s interest rate, was the weekly report of capital flows in and out of bond funds by Lipper/EPFR, which came out moments ago and which following last week’s junk bond fund fireworks involving Third Avenue and several other gating or liquidating funds, was expected to be a doozy.

It did not disappoint: in the words of Bank of America, there was”Carnage in Fixed Income” as a result of the largest outflows from bond funds since Jun’13 ($13bn) with outflows concentrating, as expected, in illiquid & low-quality assets.

The details showed a broad revulsion to all aspects of the fixed income space, from Investment Grade, to Junk to bank loans. To quote Bank of America:

Huge $5.3bn outflows from HY bond funds (largest in 12 months)

$3.3bn outflows from IG bond funds (outflows in 4 of past 5 weeks) (2nd biggest in 2 years)

$2.2bn outflows from EM debt funds (largest in 15 weeks) (outflows in 20 of 21 weeks)

Huge $1.8bn outflows from bank loan funds (largest in 12 months) (outflows in 19 of past 20 weeks)

Bloomberg, which cited BofA numbers, and yet which had different totals was nonetheless close enough. It reported that investors “pulled $3.81 billion from U.S. high-yield bond funds in the past week, the biggest withdrawal since August 2014, according to Lipper.”

The FT’s numbers were even more different:

Investment grade bond funds in the US have been hit with a record wave of redemptions, a week after two high-yield funds announced they would shutter and another barred withdrawals as the credit market showed further cracks.

Investors withdrew $5.1bn from US mutual funds and exchange traded funds purchasing investment grade bonds — those rated triple B minus or higher by one of the major rating agencies — in the latest week, according to fund flows tracked by Lipper.

The figures, the largest since Lipper began tracking flows in 1992, accompanied another week of $3bn-plus withdrawals from junk bond funds.