Betting on central banks, investors buy junk debt and emerging assets

By Sujata Rao

LONDON (Reuters) - Investors betting on policy easing from global central banks committed money to emerging equity funds for the first time in five months this week and also bought more junk-rated bonds, Bank of America Merrill Lynch said on Friday.

Central bank policies have spurred "risk-on", BAML's weekly flows report said, noting $4.5 billion had flowed to global equity funds - a 10-week high - while junk bonds took $2.9 billion, the biggest three-week inflow streak in three years.

BAML said the numbers reflected "inflows to weak dollar plays", namely emerging markets and high-yield bonds, though gold, traditionally viewed as a safe haven from uncertainty, is also benefiting.

The dollar has lost about 2 percent in 2016 to a currency basket <.DXY> as U.S. rate hike bets have been scaled back.

The BAML report said emerging debt funds took in $1.1 billion, the largest inflow in a year while EM equities received $1.7 billion, the most since July 2015. U.S. equity funds took their first money in 10 weeks at $3.9 billion.

Government bond funds saw their third week of outflows, shedding $1.4 billion.

Markets are predicting just one U.S. rate hike by end-2016. But the European Central Bank cut rates deeper into negative territory this week and the Bank of Japan will likely do the same in coming days.

Reaction to the ECB on Thursday was underwhelming, however, with the euro ending the day stronger on signals more rate cuts are not on the cards.

BAML said the flow figures and the ECB reaction showed the risk rally was "topping", as it had been driven solely by central bank expectations.

"Central banks have played the 'rates card' as aggressively as they can; ECB is done, BoJ has nothing in the tank, and any U.S. macro strength will elicit Fed rate hike expectations," it added.

Possibly reflecting the uncertain mood, gold stayed in demand for the ninth straight week, taking in $1 billion - its longest inflow streak since October 2012.

(Reporting by Sujata Rao; Editing by Toby Chopra)

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