Rush to junk bonds gathers pace on Fed's `game-changing' pledge

By Yoruk Bahceli and Thyagaraju Adinarayan

LONDON (Reuters) - Junk-rated bonds saw record inflows of $10.5 billion in the week to Wednesday after the U.S. Federal Reserve's "game-changing" move to expand its corporate bond-buying programme to include some speculative-grade debt, BofA said on Friday.

Returns on U.S. high-yield bonds have fallen to their lowest level since 2008 in March. The Fed's decision last Thursday set off a rush back into junk bonds for investors, who had already started to throw record amounts into the market.

"Inflows should keep pace, as this is a driver in addition to putting an end to the lockdown periods in both the Europe and the U.S.," said Benjamin Sabahi, head of credit research at Spread Research, a Lyon-based provider of high-yield market analysis.

Graphic: https://fingfx.thomsonreuters.com/gfx/mkt/bdwvkmqqvmn/Pasted%20image%201587121803844.png

Fed intervention has helped accelerate bond sales from junk-rated companies, with borrowers raising nearly $10 billion of debt this week in the United States, up more than 60% from the previous week, according to Refinitiv IFR data.

Although the European Central Bank does not purchase junk debt, the turnaround in sentiment also helped the European high-yield market to re-open after a two-month break with a bond sale by Swedish alarms company Verisure on Thursday.

"... I would expect many euro high-yield corporates to tap U.S. investors, as the rally of U.S. high-yield may be even quicker than in Europe because of the Fed buying notes in the secondary market," Spread Research's Sabahi said.

Risk assets across the world rallied in the past few weeks as governments and central banks announced unprecedented stimulus to ward off the economic blow from coronavirus lockdowns.

Equity funds enjoyed inflows of $10.7 billion, while government bond funds got $14.1 billion, according to BofA's weekly fund flows data, based on figures from EPFR Global. Cash remained king, attracting $52.7 billion.

BofA's sentiment gauge, the Bull & Bear indicator, remained pinned to zero, implying extreme bearishness, which usually heralds a big bounce, the bank added.

(Reporting by Yoruk Bahceli and Thyagaraju Adinarayan, editing by Larry King)

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