What’s going on here?
US high-yield bond funds saw a $5 billion inflow in May, marking the year’s largest monthly influx and pushing total inflows to $6.1 billion from January to May 2024.
What does this mean?
The surge in investment reflects growing anticipation of Federal Reserve rate cuts. Investors are flocking to high-yield bond funds for price appreciation and lower corporate credit risks. Attractive yields compared to the 5 and 10-year averages, solid corporate profits, and potential Fed easing have further fueled interest. The iShares iBoxx $ High Yield Corporate Bond ETF led the market with $1.99 billion in May inflows, while the ICE BofA Global High-Yield Bond Index shows US high-yield bonds offering a premium of over 310 basis points above 10-year US Treasury notes.
Why should I care?
For markets: Navigating towards potential gains.
Investors are betting on high-yield bonds to outperform amid expected Federal Reserve rate cuts and attractive yields. This is bolstered by S&P Global Ratings’ forecast of a decrease in the US speculative-grade corporate default rate to 4.5% by March 2025. Significant inflows were seen by ETFs like iShares iBoxx $ High Yield Corporate Bond ETF and iShares Broad USD High Yield Corporate Bond ETF, reflecting strong market sentiment.
The bigger picture: High-yield bonds in the spotlight.
The influx into US high-yield bond funds highlights a shift towards assets offering better returns in a low-rate environment. Analysts suggest potential Fed rate cuts could enhance liquidity and ease cash flow constraints for high-yield bond issuers. Despite historically tight credit spreads posing a challenge, Harris Associates and Federated Hermes emphasize the asset class’s attractiveness for those seeking absolute value, with a 7-7.5% carry providing a buffer against spread widening.