Funds that invest in high yield bonds have experienced a rate of inflows unseen for almost five years, according to recently released data.


High yield bond funds took in $358 million for the week ending May 21, according to research firm EPFR Global. “There’s a lot of money on the sidelines,” said Brad Durham, a managing director with the firm.

“In a period of relative calm, a lot of money is flowing back into beat-up asset classes.”


EPFR found that outflows were greater than inflows for essentially all of the first quarter, except for one week in March. Then, in the week ending April 9, high yield bond funds experienced a surge of inflows totaling $877.8 million. Inflows have been greater than outflows every week since.


Another research group has made similar findings concerning the rate of inflows into high yield bond funds, though this group’s numbers do differ. Robert Adler, president of AMG Data Services, says his firm uses a different methodology that gives much different numbers than EPFR.


AMG, which focuses on the U.S. domestic mutual fund market, found that for the week ending May 21, U.S. domestic high yield mutual funds took in $190.7 million.


“The rate of inflows is now at a higher rate than at any time since September of 2003,” Adler said. Indeed, the market confidence has grown from a mild susurration to a steady stream of investment. “It’s not just a single week. We have three weeks in a row where the four-week average rate of inflows has exceeded $500 million,” Adler said. “There is continuity here.” The four-week average rate of inflows increased from $243 million in early April to $562 million in late May, according to AMG.


AMG found that over the four weeks ending May 21, the number of funds reporting inflows each week exceeded 150, and one week it totaled 247. Fund numbers had not been that high since April 2007, Adler said.


High yield has joined other high-risk categories in being high on the inflow list. Adler says people are now generally entering the riskiest sectors first. “There is a general entrance into the market in [these higher-risk] sectors first,” he said. “These are the sectors that are reporting these disproportionate inflows.”


Other assets with disproportionate inflows are real estate equity funds, aggressive growth funds and international emerging market equity funds, according to Adler. Meanwhile, EPFR has found emerging market equity funds to be receiving strong inflows as well. And global equity funds received their strongest weekly inflow so far this year for the week ending May 21.


Interest in the high yield bond market has been helped by several factors: the low prices on bonds trading on the secondary market and the state of spreads in the wake of low default rates. Yield spreads above Treasurys have dropped since passing the 800 mark in March (see HYR, 3/31/08), but are still wide. The Merrill Lynch High Yield Master II Index spread was at 661 bps as of May 28.


High yield funds have also been helped by the resurgence of the high yield bond primary market: As of May 28, issuers have priced more than $16 billion in new high yield bonds, according to KDP Investment Advisors’ forward high yield calendar. The rate of new issues picked up substantially last month: $4.5 billion in new bonds emerged in April and by the middle of last week, more than $12.47 billion had been recorded so far for May.


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