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High yield funds suffer as falling junk bond prices test investor appetite for asset class

Over the past two years yield hungry investors have proved willing to digest junk bonds with increasingly unpalatable combinations of risk and return, but indigestion may finally be setting in.

The week ending July 23 saw investors pull USD4.77 billion from EPFR Global-tracked high yield bond funds – a 55 week high – while flows into investment grade bond funds climbed for the third straight week to their highest level since mid-May.

Concern that falling unemployment and rising prices could see US interest rates hiked as early as 2Q15, rather than the previous consensus of early 2016, also hit US and emerging markets equity funds. Outflows from the former jumped to a nine week high while the latter saw a six week inflow streak snapped.
Elsewhere, investors weighing the outlook for Europe’s fragile recovery in the light of recent data and the renewed tensions with Russia over Ukraine’s civil war extended Europe equity funds’ current losing run and pulled the most money out of Russia equity funds since the final week of January. But they pumped nearly USD2 billion into Europe bond funds.
Overall, EPFR Global-tracked bond funds took USD1.94 billion during the third week of July while equity funds saw a net USD4.69 billion flow out.
US money market funds absorbed USD4.28 billion ahead of the Securities Exchange Commission’s decision to adopt reforms that will require some funds to float their net asset values rather than peg it to the dollar-in-dollar-out standard.

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