We're in the midst of earnings season, and thus far the news
is largely positive. Roughly 80% of companies that report
earnings beat analysts' profit estimates, while 69% exceeded
However, despite the good news, there has been aggressive
selling of risky assets, namely, U.S. equities and high yield
bonds, the latter being particularly surprising. All in all, this
seems to be a sign of investor fatigue setting in, as I write in
weekly investment commentary
Last week, investors pulled $4.2 billion from global exchange
traded products, representing the first weekly outflow since late
May. Selling was particularly aggressive for U.S. large caps,
which lost $6.8 billion, while European equities lost $600
million in their third straight week of outflows.
Still, stock prices are lofty and not a lot of bad news is
priced in to the market. Even with decent earnings it appears
that investors are getting nervous.
However, high yield is somewhat more surprising. High yield is
often thought of as the most "equity-like" segment of the bond
market. Good news on the earnings front and a strengthening
economy usually translate into support for high yield bonds. In
addition, default rates on high yield bonds are low.
Nonetheless, over the past two weeks, $4 billion has come out
of high yield mutual funds and exchange traded funds (ETFs). We
saw $1 billion leave high yield ETFs last week alone. The recent
selling has pushed yields up around 0.40% from their June
True, high yield has seen significant inflows over the past
several years, a result of investors' quest for yield in a low
interest rate environment. No one would describe it as cheap.
Still, I'm surprised by the recent outflows for two basic
The interest rate environment has remained remarkably
The yield on the 10-year U.S. Treasury has been hovering around
2.50% as investors have continued to buy bonds amid persistent
Low and stable inflation.
Last week provided more evidence that inflation is not an
imminent threat. U.S. consumer inflation was in line with
expectations, up 2.1% year-over-year, while core inflation
actually surprised to the downside with a 0.1% increase. This put
the year-over-year number at 1.9%. Despite recent fears over
higher prices, for now, core inflation remains well anchored at
its 10-year average.
Given the amount of inflows into high yield in recent years,
more outflows and volatility are certainly possible in the near
term. But for investors with a longer time horizon, I would
hold course. I still believe the supply/demand balance is
favorable and that high yield continues to offer attractive
yields relative to the alternatives.
Russ Koesterich, CFA, is the Chief Investment Strategist
for BlackRock and iShares Chief Global Investment Strategist.
He is a regular contributor to
and you can find more of his posts
Fixed income risks include interest-rate and credit risk.
Typically, when interest rates rise, there is a corresponding
decline in bond values. Credit risk refers to the possibility
that the bond issuer will not be able to make principal and
interest payments. Non-investment-grade debt securities
(high-yield/junk bonds) may be subject to greater market
fluctuations, risk of default or loss of income and principal
than higher-rated securities.