Record Outflows From US Junk Bond Funds

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Investors have pulled a record amount out of U.S. junk bond funds in the past week, beating a speedy retreat from what has been one of the hottest areas of the fixed income market in the past year.

U.S. high-yield funds saw a record $4.63 billion in outflows for the week ending on Wednesday, according to Lipper.

Interest rate volatility has surged in recent weeks since benchmark Treasury yields have risen sharply, with selling spilling over into other key areas of the bond market. As exchange traded fund providers and mutual funds face redemptions, they are forced to sell more of their holdings, putting further pressure on prices.

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"We are definitely worried that the market is in a cycle where selling of bonds begets more selling," said Steven Boyd, principal at Halyard Asset Management.

The hefty outflows illustrate the anxiety of investors ahead of the May employment report due on Friday. The Federal Reserve has indicated that its suppression of interest rates under quantitative easing depends on the tone of economic data, led by the monthly jobs figures.

"'The jobs report will be a harbinger for how bonds trade during the rest of the month," said Mr. Boyd.

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Heightened interest rate volatility has punished the performance of bonds in recent weeks. The market's benchmark, the Barclays U.S. Aggregate index, which consists of Treasury, mortgage and corporate debt, has registered a decline of 1 percent for 2013, its worst year-to-date performance year since the great bond market rout of 1994.

Ed Marrinan, head of macro credit strategy at RBS, said high-yield bond fans had all deserted the sector at once.

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Investors who are bullish on the economy fear an end to quantitative easing could remove a force that has pushed high-yield bonds higher; investors who are bearish on the economy fear that low yields on junk bonds don't provide enough compensation for the growing risks of default; and investors who don't know, don't want to hold relatively risky assets in an uncertain environment.

"When the market lacks clarity, when it lacks consensus, that is when you end up with volatility and that takes its toll on risk assets," Mr. Marrinan said.

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The accelerating outflows are already showing up in junk bond prices, which have fallen sharply, sending yields higher. The average yield has surged from its historic low of 4.95 percent on May 9, to 6.16 percent on Wednesday night, according to a Barclays index. That figure was the first time in 2013 that the yield has been above 6 percent.