ECB announcement breathes life into debt funds

The European Central Bank helped credit as an asset class, and of course corporate bonds within it, become attractive to investors again.

Right after ECB head Mario Draghi announced that the central bank will begin buying corporate bonds under its quantitative easing programme, “credit flows broke free from a long period of outflows,” analysts from Bank of America Merrill Lynch, which compiles weekly data on flows, said.

In the week that ended on March 16, European investment grade debt funds but also high yield bond funds saw their biggest inflows in 53 weeks.

Surprisingly, it wasn’t the high-yield debt funds that led the recovery – they had already seen inflows for four consecutive weeks, after hemorrhaging funds for a while before that. No, it was investment grade debt funds that led the way, in a clear sign that this was the ECB’s doing.

“This considerable shift in momentum was mainly thanks to a decisive shift in high grade. The asset class recorded its first inflow in 10 weeks and the biggest for more than a year,” the analysts wrote in their weekly report.

Looking at capital flows globally, a similar picture emerges. Investment grade bond funds saw their largest inflows since June last year, worth $3.8 billion, while high yield debt funds saw their biggest four-week inflows in four years, with $2.9 billion pouring in only last week.

Even emerging market debt funds, until not long ago the victims of huge redemptions by investors, have been experiencing inflows over the past four weeks. Last week, the asset class took in around $800 million.

Equities in emerging markets have also seen some sort of recovery: in the past two weeks, inflows to the asset class have totaled $3 billion, with $1.4 billion going in last week.

However, to put things into perspective, data show that over the past three years investors have redeemed $164 billion from emerging market equities.

European and Japanese equities are losing their appeal.

European and Japanese equities are losing their appeal.

European stocks, by contrast, did not benefit from Draghi’s announcement. They saw the biggest outflows since October 2014 last week, worth a massive $4 billion. Japanese equities also saw small redemptions, worth $400 million.

Perhaps surprisingly, US stocks saw capital flowing in. A total of $3.8 billion went into US equities last week.

This data was collected before the Federal Reserve’s more dovish than usual meeting last Wednesday, so add a weaker dollar into the mix and it looks like the rush to emerging market assets, as well as high yield debt, could continue for a while.