Investor fears about liquidity in junk bonds have leaked into the investment grade sector of the market, with redemptions from corporate bond funds hitting record highs in the week running up to the Federal Reserve meeting.
Global bond funds saw their largest outflows since June 2013 in the week to Wednesday 16th December, with some $13 billion being pulled from the sector, including, high-yield and investment-grade strategies.
BofAML said the "carnage in fixed income" was still focused on junk bond funds, which saw $5.3 billion of the outflows. Meanwhile, corporate investment-grade debt funds saw around $4.8 billion in net redemptions, according to separate data from Thomson Reuters Lipper which also showed that the net outflows from bond funds over the period were the largest weekly outflows since Lipper started tracking fund flow data in 1992.
"During the fund-flows week ended December 16, 2015, investors became somewhat bipolar ahead of the U.S. Federal Reserve's two-day policy meeting," said Tom Roseen, head of research services at Lipper, in a statement attached to the data.
"At the beginning of the flows week, investors learned of a meltdown in Third Avenue Focused Credit Fund, a high-yield mutual fund; it began blocking investors from making redemptions, weighing heavily on other high-yield offerings as investors began to wonder if the related selloff might extend into other funds in the group," he said.
The junk bond sell-off was sparked by a move to shutter two high-yield credit funds, Third Avenue and Lucidus, on Wall Street and block withdrawals from third with investors attempted to pull their money from battered funds.
High-yield bonds, otherwise known as speculative grade or junk debt are bonds issued by companies that carry a rating of 'BB' or lower from Standard & Poor's or 'Ba' or below from Moody's. They have a higher risk of default compared to investment-grade debt but give a better return for investors as yields are higher.
WisdomTree Europe's director of research, Viktor Nossek said the widening of credit spreads between U.S. government bonds and corporate bonds is something that will likely continue in 2016.
"Investors will discriminate more between corporate issuers given heightened default fears, driving the yield wedge between investment-grade debt and everything below it, and between corporate sectors considered higher quality than their peers," he said.
"Sentiment in junk bonds, as well as smaller energy and base metals issuers, is expected to sour further and increase pressure on prices of borderline investment-grade credit. It should also mean investors gravitate further into the crowded trade of prime credit issuers in Europe," he added.