High yield bond funds suffered their first redemptions since June last week in a sign that investor nerves have been rattled by the rapid drop in the price of crude.
The asset class, which had enjoyed a remarkable recovery after a turbulent first quarter, counted $ 1.9bn of withdrawals in the week to August 3, according to data provider EPFR. It marked the largest withdrawal in seven weeks and drained junk bond fund inflows for the year to less than $ 1bn.
Scrutiny of the energy sector has come to the fore after US oil prices briefly dipped below $ 40 a barrel, sliding into bear market territory. The threat of rising inventories of gasoline — which slipped after three successive weeks of increases — as the driving season in the US winds to an end has weighed on the energy sector.
Bonds issued by a swath of lowly-rated groups have weakened since oil began its slow and seemingly silent decline. While West Texas Intermediate, the US oil marker, has advanced for two consecutive days — the first time it has done so since mid-July — it remains 19 per cent below the year’s peak.
Debt sold by oil exploration group Murphy Oil, offshore drilling servicer Rowan Companies and oil and gas servicer Weatherford International, have all weakened over the past two weeks, data from electronic bond trading platform MarketAxess shows.
“People watch oil pretty closely with high yield given what has happened over the past 18 months,” said Marc Bushallow, managing director of fixed income at Manning & Napier. Mr Bushallow noted that the drop in bond prices was far more moderate than slides seen in January and February, when fears swelled that many junk-rated energy groups were on the verge of default.
“You have not yet seen a lot of forced sellers,” he added. “It remains pretty well bid on a day like today when equities are unchanged.”
The search for income sent buyers instead to US corporate and emerging market debt funds, which have been appealing destinations for foreign investors. Bond-buying programmes from the Bank of Japan and European Central Bank, as well as fresh stimulus from the Bank of England on Thursday, has depressed sovereign bond yields across the globe and driven many investors out of their home markets.
Emerging market bond funds counted $ 2.1bn of fresh additions in the last week, lifting inflows over the past five weeks to $ 16.4bn, according to the EPFR data.
Funds that invest in highly rated US corporate bonds counted $ 735m of inflows in the last week, more than doubling the prior week’s haul and extending its streak of inflows to 10 weeks.
European equity funds remained under pressure as investors assess the fallout from Britain’s vote to leave the EU. Investors withdrew $ 3.9bn from funds invested in stocks across the continent, lifting outflows since the Brexit vote to $ 24.5bn.