"Let's Buy Junk Bonds Following the Fed"... 13 Trillion Won Inflow into Speculative Grade Corporate Bonds in Just One Week

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Since the U.S. Federal Reserve (Fed) announced it would purchase speculative-grade corporate bonds (junk bonds) to provide liquidity, investors have been flocking to the junk bond market.

According to Emerging Portfolio Fund Research (EPFR), a fund analysis firm, as of the 15th (local time), $10.5 billion (approximately 12.8 trillion KRW) flowed into junk bond mutual funds and exchange-traded funds (ETFs) over the past week. This is the largest weekly inflow on record. The previous largest inflow was recorded on the 1st, when $7 billion was invested within a week. Compared to that, the inflow volume increased by 49% in just two weeks. Of the funds that flowed in over the recent week, more than half, $8.6 billion, went into U.S. funds.

Since the COVID-19 outbreak, concerns about credit tightening have grown, raising fears that the junk bond market, which consists of companies with relatively low credit ratings, could deteriorate. However, the situation reversed after the Fed announced on the 9th that it would purchase junk bonds, commercial mortgage-backed securities (CMBS), and collateralized loan obligations (CLOs), injecting up to $2.3 trillion in liquidity.

Although the Fed has not yet actually purchased junk bond ETFs since the announcement, the price of BlackRock's HYG fund, the world's largest junk bond ETF, rose 6.5% in a single day on the announcement day, the 9th, marking the largest increase since the global financial crisis. The spread, which represents the yield difference between junk bonds and U.S. Treasury bonds, has also been narrowing. It recorded 10.1 percentage points last month, the highest recently, but as of the 15th, the spread fell to 7.6 percentage points.

Elaine Stokes, Senior Portfolio Manager at U.S. investment management firm Loomis Sayles, said that the selling pressure on junk bonds stopped immediately after the Fed's announcement, explaining, "The Fed has taken stronger measures than anything it has done before." Steven Oh, Global Head of Credit and Fixed Income at PineBridge, analyzed, "Both retail and institutional investors are stepping up as buyers of high-yield bonds," adding, "Many investors prefer to follow the Fed rather than fight it and want to buy what the Fed is buying."

This content was produced with the assistance of AI translation services.