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European bond investors look for safety

According to Morningstar’s latest fund flow data, high yield registered net outflows for a third consecutive month. Almost €17bn has now left the asset class since July, with the outflows concentrated in US high yield and global high yield. The outflows in high yield contrast with strong net inflows into investment-grade credit. There have been net inflows into the asset class every month this year, despite record-low yields. Net inflows totalled €2.2bn in September.

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No appetite

High yield’s marked unpopularity (no asset class has seen net outflows as large as high yield in the second half of this year) is in line with appetite with European fund selectors. The only financial centre in Europe harbouring a decent percentage of high yield fans is Geneva, while everywhere else sentiment is net negative by a wide margin (see chart). More or less the same counts for developed market corporate bonds though. Only Norway, with 20% buyers, has a sizeable number of investment-grade bond fans.

High yield                                            Dev mkt corporate bonds

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Risk-aversion

That the asset class is nevertheless popular might have something to do with increased risk-aversion among bond investors. The strong net inflows into comparatively risky emerging market debt witnessed in July and August have all but dried up, while investor appetite for alternative fixed income strategies has proved resilient and even increased slightly recently. Net inflows into long/short fixed income funds amounted to €1.3bn in September, and have totalled €10.3bn YTD. On top of that, alternative multi-strategy funds, which typically can invest in any kind of equity and fixed income alternative strategy and serve aim to achieve low correlation with equity markets and low volatility, saw net inflows of €9.5bn so far this year.    

Part of the Bonhill Group.