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US high yield seesaws but keeps its nerve

Record outflows in June; Leveraged loans hold firm

After suffering a monthly outflow of $1.7 billion – the worst on record – in June, the US high-yield bond market got its groove back last month, with junk bond mutual funds registering their highest weekly inflow of the year. High-yield bond funds took in $1.3 billion from retail investors during the week ending July 15, equivalent to 1.1% of assets under management in the sector, according to fund data provider Lipper FMI.

Appetite for floating-rate leveraged loans withstood the recent sentiment crisis. Loan funds took in $1.8 billion in June, extending their run of net positive inflows to 54 weeks on the trot. Moreover, loan investors have more capital in the primary markets than their bond market peers, JPMorgan said in a recent credit strategy update. For example, loan investors bought eight new deals totalling $3.6 billion in the second week of July, while bond investors bought nine deals totalling $2.7 billion.

Perhaps a weak second quarter was just what the doctor ordered to revive risk appetite among US investors. Indeed, before the recent repricing in credit the extended rally in both bonds and loans had led to concerns that the market was overbought.

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