Capital Signals: Run! U.S. Junk Bonds and Leveraged Loan Funds Face "Record Outflows"

The U.S. junk bond and leveraged loan markets are experiencing a "great escape" by investors, with record amounts of capital fleeing rapidly. According to media reports on April 11, as of Wednesday, data from LSEG Lipper on the London Stock Exchange showed that high-yield bond funds and leveraged loan funds faced historic weekly outflows of $9.6 billion and $6.5 billion, respectively. Meanwhile, a $6 billion high-yield bond fund managed by State Street fell 2.9% this week, marking its worst weekly performance in nearly three years. The massive outflow of funds began on April 2, after Trump announced hefty tariffs on several trading partners, leading to a gradual buildup of concerns. Although Trump suspended "reciprocal tariffs" on many countries yesterday and U.S. stocks rebounded strongly, the uncertainty surrounding tariffs and pessimistic expectations for the U.S. economy have led to continued selling of U.S. assets. Risk Asset Premium Soars: Market Panic Evident The spread on junk bonds, typically referring to the additional premium paid by low-rated borrowers over U.S. Treasury yields, has risen from about 2.9 percentage points in early January to over 4.4 percentage points this week, reaching its highest level since the end of 2023. Analysts at Morningstar wrote in a report on Wednesday: Products built around credit risk in ETFs have been shunned. Investors are shifting from low-rated bond funds and investment tools holding leveraged loans to lower-risk fixed-income funds, which hold assets such as government bonds, inflation-protected securities, and very short-term bonds. David Forgash, head of leveraged finance at Pimco, stated: We do expect the default rate in the leveraged loan market to rise. In the context of heightened tensions following a shift in sentiment, this has reduced investors' (including our own) tolerance for investing in higher-risk credit. Economic Hard Landing Risk Rising: Credit Indicator Alarms Sound The credit conditions for U.S. borrowers had improved due to rising stock prices in early 2023 and 2024. However, with the risk of economic growth slowing and the threat of recession looming, this trend may be reversed. According to data from JP Morgan, the leverage ratio of loan issuers over the past three months in 2024 has dropped to 4.78 times, the lowest level since the pandemic, significantly lower than the 7.71 times seen in early 2021. However, JP Morgan analyst Nelson Jantzen warned: We believe credit indicators may further improve over the next quarter, but the anticipated slowdown in the U.S. economy will weigh on fundamentals (in the second half of 2025). Fund managers and bankers described trading over the past week as relatively orderly, contrasting with the chaos in the credit markets that prompted Federal Reserve intervention during the COVID-19 pandemic. However, the severity of the new tariffs and the ongoing uncertainties in the market have caught some investors off guard. "There have been many signs that these tariffs would be implemented," said Matthew Bartolini, head of Americas ETF research at State Street Global Advisors, "What is surprising is how harsh they are." As investors continue to withdraw from high-risk assets, the market is sending us a clear signal: storm clouds are gathering, and wise investors are seeking safe havens