An analysis of Morningstar’s fund flows data shows that net flows into and out of European equities and high yield bonds have moved pretty much in tandem since the taper tantrum in the summer of 2013 (see graph) below.
After high yield bonds suffered record net outflows exceeding €10bn in June 2013, net inflows turned positive in July, only to return into negative territory a year later. Around the start of this year, investors started to pour in money into high yield bonds once again.
European equity net fund flows followed almost exactly the same pattern over the period (see chart above), though net inflows tended to be slightly higher, while net outflows during periods of market stress were a bit lower.
Interestingly, investment returns for the two asset classes have also been very similar, especially since October 2013 (see graph below). Until spring 2013, high yield, most of which consist of dollar bonds issued by American companies, had moved in tandem with US equities. After a brief intermediary period, the asset class then found a new partner in European equities in autumn that year.
So it’s probably fair to conclude that equities and high yield bonds are related, though they are not exactly twins, and look more like a couple. High yield bonds have been dating US equities for a while, but now it’s in a cosy, and more stable relationship with European equities. It’s not only the returns they have in common, also the flows.