Investors poured a record amount of cash into U.S. high-yield funds this week as the junk-bond market recovered from its worst slump in more than a decade.
The funds added $7.09 billion in the week ended Wednesday, according to data from Refinitiv Lipper. This reversed a course that had seen almost $20 billion withdrawn from those same funds over the last six sessions, including $2 billion last week.
Investors have been wading back into the market after the government’s $2 trillion stimulus package and Federal Reserve efforts to keep liquidity flowing in the corporate debt market. Junk bonds have gained this week after a March that was the worst for returns since 2008.
Spreads have tightened almost 200 basis points in a little more than a week to 909 basis points on Wednesday. Average yields also dropped by almost 200 basis points in the same period, to 9.73%.
The prior record flow into U.S. junk-bond funds was $4.97 billion in March 2016, Lipper data show.
As U.S. junk bonds started to find a floor, investors including Goldman Sachs and Invesco are seeing reasons to buy.
“There are tremendous opportunities out there,” said Ashish Shah, co-chief investment officer of fixed income at Goldman Sachs Asset Management. He estimates junk bonds will return about 20% this year as growth rebounds in the fourth quarter and fallen angels outperform.
High-yield lost 11.5% last month and is down 13.6% this year. The market fell almost 16% in October 2008. Last year’s total return was 14.3% and high-yield hasn’t been up more than 20% since 2009, when it surged 58%.
Scott Roberts, who manages a high-yield portfolio of just over $6 billion at Invesco, describes high yield as a “once-in-a-decade opportunity” which will be “gone way before the fear subsides.”
High yield has “a history of bouncing back strongly from episodes of massive fear,” Roberts said.
“Monetary stimulus has added a floor,” said Michael Terwilliger, a portfolio manager at the Resource Credit Income Fund. Investors taking a “12-month view will capitalize on an attractive entry point,” Terwilliger said.
High-yield companies have taken advantage of the better tone to replenish credit lines tapped from banks in recent weeks and to bolster liquidity in the wake of disruption from the coronavirus. TransDigm Group Inc., Tenet Healthcare Corp. and Restaurant Brands International Inc. are selling junk bonds Thursday following an oversubscribed deal from Yum! Brands Inc. earlier this week that reopened the new issue market after a near-month shutdown.
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