The recent rally in high-yield bond prices should stem the flow of funds out of high yield, said Chris Garman, head of high-yield strategy at Merrill Lynch. He believes the strength of the recent upturn in high yield warrants investors overweighting the sector. The Merrill Lynch U.S. High Yield Master II Constrained Index finished May 31 at 99.4 cents on the dollar after bottoming around 97 cents on May 18. Even with the recent rally in prices, mutual funds most recently reported 15 consecutive weeks of outflows from high yield, amounting to $9 billion in withdrawals, roughly 6.7% of the asset class, this year.
"With the market stabilizing, I'd expect cash to return to the market," stated Garman, as obviously rising prices should result in more incremental demand for junk paper. Furthermore, the strategist pointed to inflows into equity funds as indicative of a bid for risky assets. "That people are willing to put cash into the lower credit tiers speaks well for the credit environment," he explained.
