The Credit Rally of 2009

I commented on a previous post about how I think index funds could be driving the high yield / credit rally that we have seen in distressed debt and on-the run vanilla high yield in the past 6 months.

Accrued Interest, one of my favorite blogs out there, posted a fantastic piece on mutual fund flows over the past two years, and what effects these might have had on the credit rally:

"So far this year investors have added virtually nothing to equity funds. There is no mania there, at least not when it comes to retail mutual fund investors. Now there is significant variation month-by-month. In the first three months of 2009, investors withdrew $40 billion only to add $53 billion since. But even there, it doesn't look like a mania at all. Over the last 6 weeks, there have been $4 billion in net redemptions. Even the $53 in net purchases over the last 6-months seems paltry compared with the $233 billion in redemptions last year.

By contrast, take a look at bond funds. Fund investors have made net purchases to the tune of $253 billion so far this year. That is just about double the last two years of net purchases combined.

And unlike stocks, bond investors don't have any need to "catch up." If anything, mutual fund investors would seem to have come into 2009 over weighted in bonds. Not only did mutual fund investors redeem $233 billion in equity funds in 2008, those same funds plunged in market value during the year. If retail investors followed any kind of rebalancing discipline (no laughing back there anyone who deals with retail investors... I said "if"), there would be the need to redeem bond funds and buy stock funds. Right now the opposite is happening.

So it makes one wonder. If there is a bubble, isn't it more likely in bonds? If there is an asset class that is getting more than its fair share of the excess liquidity, it isn't stocks. Its debt."

What a fantastic posts. I wonder how much of the fund flows have been to index funds who apparently cannot get their hands on bands in the primary and hence are pushing up prices after the break? Is that why we are seeing IG bonds trade 20-30 basis points tighter than when issued or high yield bonds trade up 3 - 6 points on the break?