CREDIT RESEARCH: Weekly Fund Flows

Inflows continued for € & $ credit for the week ending Wednesday – in line with what we saw through the week in $ ETF’s there has been a slowdown in the pace for $ IG & HY while € saw a pickup in the pace of its inflows. Credit’s demand again seems duration/yield driven – US equities continued to face outflows through the first week of earnings. The divergence seems to be echoed in secondary markets - our credit weighted equity indices have fallen ~2% this year reversing just over 1/5th of its rally since late October – meanwhile credit-spreads have resumed their rally breaking earlier set tights. The missing piece driving inflows may be index yields that are +20-30bps this year as rates re-price expected CB tightening across both. The impact of this on ICR’s seems to (for now) be in the backseat for investors but is likely to get some focus as we roll through Q4 & get updated interest costs – focus may be on €IG’s where we see ICR’s currently testing pre-covid/post-GFC lows. Looking ahead earnings growth forecasted for this year should provide a buffer to ICR’s – though that relationship may be tested if forecasted better activity/earnings is met with less easing/ higher rates. Back to flows there was also reported outflows in £IG – the reporting period doesn’t capture much of post-CPI tightening in BOE curve – its pared half of that tightening since so limited impact overall & Gilt/Bund 10’s are still trading in tandem. Still the weakness in flows are echoed in secondary spreads - £IG is +3bps wider this week vs. € & $ that are 1-2bps tighter continuing its YTD underperformance.

More timely ETF flow data is pointing to outflows gathering pace in $ credit – seems focused in long-end $IG & in $HY. Fairly consensus steepening view has had a temporary pause over the last week – worries that might continue (YTD long end $IG yields have underperformed short-end by 17bps) alongside aggressive re-pricing in front end rates this week may be driving the flow skews in recent sessions.