AroundTown: bad call
Starting yields one year ago today were significantly lower than they are now. At that time, yields were not providing much protection in fixed income markets given the volatile macro environment that was about to unfurl, with central banks still holding rates around the zero lower bound and inflation looking increasingly persistent even before Russia’s invasion of Ukraine.
As we look through the fixed income fund flows of 2022 we are not surprised to see significant outflows in credit markets, and a particularly clear decompression between investment grade and high yield demand, with IG posting net outflows of 6% of AUM for 2022 versus a staggering 17% for HY. Looking through the data in detail though, it is clear that flows in the second half of the year were much improved versus the first half, particularly in IG, as yields continued to move higher and investors became more comfortable around expectations for inflation and where terminal rates might end up.
Positive flows, coupled with very high investor cash balances and limited bond supply (European HY actually saw negative net supply in 2022) drove a more supportive technical through the back end of last year, one that will help us on our way into 2023.
Even with that strong performance in Q4 though, starting yields are higher than they have been in many years, with IG yields the highest since 2009 and HY yields the highest since 2012. While we expect flows to remain more subdued in HY, we expect the positive trends seen in IG will continue into 2023. As always after periods of volatility, quality typically leads the recovery, and with investors able to buy senior IG bonds at yields higher than where CCC rated paper traded just over a year ago, we should see better-rated early new issues being met with strong demand.