Global Investors Show Appetite for Higher-Yielding Assets

on Sep 3, 2012

Global investors have recently been showing growing appetite for riskier assets, the Financial Times reported on 31 August 2012, quoting EPFR Global, the Massachusetts-based fund flows and asset allocation data provider which observed record inflows into US mutual funds and exchange traded funds (ETFs) betting on riskier debt.

According to the FT article, the amount invested into US-domiciled high-yield and mutual funds and ETFs in August reached $32 billion (£20.1 billion), the high point in a run identified as having started three months earlier. Additionally, the recorded amount is more than double the inflows into such funds over the same period in 2011 and the highest observed since EPFR started tracking the data.

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Among the global companies contributing to the increased inflows in recent weeks are General Motors Financial, Sprint Nextel Corp (NYSE:S) and First Data Corp, which collectively sold about $30 billion (£18.9 billion) in junk debt in August. Global companies with higher credit quality such as Rio Tinto and Siemens (ETR:SIE) together sold over $101 billion (£63.5 billion) in debt, according to data provider Dealogic.

!m[](/uploads/story/336/thumbs/pic1_inline.png)Bloomberg also reports that investors from Europe in particular are seeking haven in American junk bonds with the plan of the European Central Bank (ECB) to purchase government debt reportedly being held up by a German court’s ruling on a permanent bailout fund. “Last week, European investors pretty aggressively went hunting for higher yields,” noted Cameron Brandt, director of research at EPFR.

As noted in the FT article, Barclays (LON:BARC) advises that in 2012 to date American junk-rated corporate debt has generated an average return of more than 10 percent compared with just two percent on US Treasuries and 7.5 percent on investment-grade bonds.
The FT reports that borrowers have been in a hurry to sell the bonds prior to the upcoming US Labour Day holiday and the much-anticipated central banks meetings in Europe and the US. While the Federal Reserve is expected to deliver a third round of quantitative easing – dubbed ‘QE3’ – the ECB is likely to unveil details of a revamped bond-buying programme.

“If the Fed delivers a QE3 programme and the ECB does not disappoint in its explanation of its proposed bond-buying programme, then the planets would align for another very active month”, pointed out Adrian Miller, a global market strategy director at GMP Securities, as quoted by the FT.
On the other hand, if either the EU or the US policy makers fail to deliver on the expected growth stimulus measures, this may well have a negative flow-on impact on debt issuance. Even so, the FT reports Wall Street analysts estimating an additional $100 billion (£63 billion) in investment-grade and $30 billion (£18.9 billion) in high-yield bond sales after the US Labour Day market break.
The FT also quotes Steve Hussey at the asset management company AllianceBernstein (NYSE:AB) as pointing out that, while the last few weeks have seen “a lot of opportunistic financing”, people were expecting the rest of 2012 “to be more volatile and perhaps less conductive for issuance.”


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