After inflation figures calm concerns about rate increases, November inflows would be the largest since July 2020.
Investors have flocked to US corporate bond funds to the tune of roughly $16 billion this month, highlighting how prospects of slowing inflation have improved mood following a devastating sell-off in much of 2022.
Prior to November 23, funds that invest in high-grade bonds brought in $8.6 billion from new investors, while those that concentrate on riskier junk-rated paper saw net inflows of $7.1 billion. According to data source EPFR, the combined total is on track to be the largest monthly inflow since July 2020 if the current trend continues in the last week of November.
The surge in credit fund inflows coincides with a late-year rally on Wall Street following statistics released earlier in November that showed the rate of consumer price growth has started to slow down, which raised expectations that the Federal Reserve may soon scale down its escalating rate increases.
Before the November 10 release of the consumer price index report, about $5 billion had already moved into US corporate bond funds, but according to EPFR data, $10.9 billion more moved into the instruments in the two weeks that followed. Following the release of the inflation report, corporate bonds have also increased in value, with a high-grade debt index tracked by Ice Data Services rising by 4.6% and cutting the decline through 2022 to approximately 15%.
In the depths of the epidemic, while the economy was being stimulated, many businesses took advantage of the low-interest rates to refinance and issue new loans. But since then, the Fed has taken the lead in tightening monetary policy to fight inflation, bringing US interest rates from almost zero to a target range of 3.75 to 4%. Concerns about the central bank and its peers putting the brakes on economic growth and causing a recession at a time when borrowing prices for firms are skyrocketing have increased as a result.
There is at least some hope that rate increases will start to halt after the CPI report revealed that the annual rate of inflation cooled to 7.7% in October from a high of 9.1% in June. Markets are pricing in wagers that US interest rates, which have previously been reported as high as 5.3%, will peak at 5% in June before beginning to decline.
'Rates are going down rather than up, so I want to be in sooner rather than later,' I think investors are saying,' said Marty Fridson, chief investment officer at Lehmann Livian Fridson Advisors.
After this year's sell-off sent rates skyrocketing, Fridson claimed that some investors may be eager to lock in greater yields. The average yield on the Ice index of high-grade corporate bonds is 5.4%, which is higher than the 2.4% projected for the end of 2021 but down than the peak of more than 6% reached in October.
The encouraging fund flow numbers for November are only a drop in the sea of withdrawals from risky US corporate bond vehicles since early January. High-yield ETFs have lost around $52 billion so far in 2022. The total amount of outflows is $44 billion so far this year, moderated by net inflows for high-grade debt.
"There's a really high degree of unwarranted optimism generated by the still rather painful statistic for US inflation in October," warned Cameron Brandt, research director at EPFR.
There is a group of investors who have been struggling in a yield-starved climate for more than ten years, he continued.