Bumper credit market inflows spark fresh fears of 'bubble'
Investors do not expect the wall of money that has flowed into the credit market for most of the past year to dissipate anytime soon despite risk premiums on bonds falling on the back of such voracious demand, fuelling fears of a “bubble” in the asset class.
In the latest credit investor survey by BofA Merrill Lynch Global Research, some 75% of respondents, mostly investment managers, said they expect cash inflows into their funds to continue even though credit spreads, or yields over government bonds, have declined dramatically, reducing returns.
The flow of money into credit funds in the past three months alone has accelerated, according to the survey, with 80% of respondents stating that they have seen net inflows since the beginning of July.
This trend is not expected to reverse soon either, although it may slow in some areas.
Barnaby Martin, credit strategist at BofA Merrill Lynch in London, said: “While some see scope for retail inflows to slow as rates rise and stimulus is removed, institutional inflows are expected to remain strong as pension funds and insurance companies address their under-allocation to credit.”
He added: “With so much liquidity, investors remain relatively comfortable about emerging micro-risks in the credit market.”
One of those is acquisition risk, but roughly 66% of respondents said they remain untroubled by this threat and have not changed their investment stance as a result.
Martin said: “No wonder then that some respondents have begun to use the word 'bubble' in their comments to describe the outlook for credit markets.”
In a change to this year’s trend, the survey said that in the last two months there has been a slight fall in the number of investors reporting to be overweight credit versus their benchmark allocations to the asset class from 42% in July to 38% this month. However, this masks the fact that this month saw a jump in investors claiming to be “very overweight” rather than just “overweight”, the survey said.
In addition, the survey showed that investors are adding more risk through duration, by shedding their overweight positions in bonds with one-year to five-year maturities and reducing their underweight positions bonds with maturities of ten years and longer.
Martin said the latter development is likely to have been helped by a pick-up in long-dated bond issuance, and that “while investors are still underweight long-dated credit – a net 20% - the current reading is almost the least underweight in the history of the survey”.
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