2021 Flows Update – Cash Heavy
Thus far, 2021 has continued the 2020 risk-on mentality as vaccinations and the recovery have been the center of focus. Another hot topic is inflation; is it transitory or not? With all this going on, we are keeping an eye on fund flows in the background – essentially, how are the “votes” being cast?
Investment Grade and High Yield have been, somewhat surprisingly, a tale of two stories thus far in 2021. The former has seen total cumulative inflows of +$176.95bn year-to-date, as of 6/2/2021. The latter has seen cumulative outflows of -$5.7bn. This has largely been attributable to two factors: a wide-open High Yield primary market that has seen $252.6bn of year-to-date new issuance (+63% y/y) and inflows to Leveraged Loans. It is likely investors are right-sizing their exposure to loans this year– which have seen inflows of +$22.1bn year-to-date – relative to High Yield. Investment Grade credit has seen option adjusted spreads (OAS) compress to +85bps while High Yield, despite the outflows, has seen spreads compress to +295bps. Each are sitting at historically-rich valuations over the past ten years – <1st percentile for IG (lowest spread) and <4th percentile for HY (9bps above the lowest spread).
Money market fund flows have been very strong in 2021 with inflows totaling +$327.9bn. This comes on the back of heavy inflows in 2020 that finished the year at +$744.8bn and peaked last May (2020) at $1.19tn. Cash on the sidelines – a topic we touched on last year – is a narrative that remains very much intact. Using history as a proxy, this cash will likely rotate off the sidelines. Following the GFC, net flows into money markets peaked in 2009 and were back to net negative by 2010.
While we continue to have a bullish view on the reopening, current market valuations are worthy of caution. Margin for error is a point we stress within our process and with credit spreads sitting at (or near) their respective tights, we’ve seen that scope narrow significantly.
Sources: Wells Fargo Securities, EPFR/Informa Business
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