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Investors pile into junk bonds

In the week ended Sept. 19, investors funneled the second-biggest weekly amount of cash ever and the most…

In the week ended Sept. 19, investors funneled the second-biggest weekly amount of cash ever and the most this year into high-yield-bond funds as the Federal Reserve's announcement of new stimulus measures pushed them toward riskier assets.

Junk debt funds recorded $3.63 billion into the funds in the one-week period, the greatest volume since the $4.76 billion of inflows in the one-week period ended Oct. 26, according to data compiled by EPFR Global. Exchange-traded funds that buy junk notes attracted 40% of all U.S. flows, the data show.

The Fed's plan to expand its holdings of long-term securities to suppress borrowing costs has spurred bond buyers to seek returns from riskier debt. More institutional investors are directing money to ETFs as unprecedented demand for the notes makes it more difficult to amass the bonds quickly, according to BlackRock Inc. managing director Matthew Tucker.

INSTITUTIONS’ BOND GRAB

“The biggest growth area that we've seen over the past 12 months has been in institutional players who trade in the fixed-income space,” said Mr. Tucker, head of iShares Fixed Income Strategy team at BlackRock Inc. “Bonds are so scarce, it's creating a lot of challenges with smaller players in the market, with them actually accessing securities.”

BlackRock's high-yield ETF (HYG), the biggest of its kind, increased its assets by $402 million two weeks ago, while State Street Corp.'s fund (SST), the second-biggest, boosted its holdings by $163 million, according to data compiled by Bloomberg.

The five-year-old industry of junk bond ETFs, listed on exchanges and brokered like stocks, has expanded by 57% this year to include almost $32 billion in assets among the five largest funds, Bloomberg data show. The Sept. 19 weekly inflows to all high-yield funds built on a record $55.9 billion reported this year through Sept. 12, EPFR data show.

While borrowers are selling speculative-grade notes in the U.S. at an unprecedented pace, most of the proceeds are going toward paying off existing debt, resulting in little growth in the pool of available bonds. About 61% of junk bonds were issued for refinancing purposes this year, according to an Aug. 31 JPMorgan Chase & Co. report.

Junk bond buyers seeking a reprieve from a fourth year of near-zero interest rates are accepting the lowest yields ever after the Fed's announcement of a third round of quantitative easing. Yields on junk bonds in the U.S. sank to a record 6.95% on Sept. 19, according to Bank of America Merrill Lynch index data.

European Central Bank President Mario Draghi in July pledged to do “whatever it takes” to save the euro from the region's fiscal crisis. Mr. Draghi announced an agreement Sept. 6 for an unlimited bond-buying program to lower borrowing costs in the region.

“The macroeconomic environment is like one we've never seen before,” said Brian Kinney, State Street's global head of fixed-income beta solutions.