"Setting The Stage For A Broad Meltdown": Bond Funds See 5th Biggest Outflow On Record

Earlier this week, GMO's James Montier repeated verbatim  one of our recurring puzzling observations about the current market: while "a recent Bank of America ML survey showed the highest level of those citing “excessive valuation” ever. Yet despite this, the same survey showed fund managers to still be overweight in equities."  Back in August, we called this just one of the many bizarre market paradoxes observed in the market.

Here is another paradox.

As we noted earlier, after last week's volocaust, this week was the best week for global stocks since 2011 as traders and algos furiously BTFD (and sold vol), clearly forgetting what happens when markets become too stretched, as they are becoming again.

It wasn't just stocks: junk bond yields dropped the most in three months, and CCC yields saw the biggest drop in more than five weeks yesterday amid what is reportedly buying flurry. As Bloomberg put it, "it was as if high yield investors were making up for the lost week" with HYCDX rising the most in 11 months, and junk bond ETFs, JNK and HYG, saw the biggest increase in three months.

As one would expected, junk spreads tightened across ratings.

And yet, despite surging prices, investors couldn't wait to get the hell out of credit amid the sudden repricing of inflation expectations which are certain to send yields higher (unless, of course, another wave of deflation emerges). In fact, BofA finds that last week saw the first simultaneous outflows from IG, HY and EM bond funds since the U.S. election.

According to BofA, which cited EPFR data, a whopping $14.1 billion was pulled from debt funds, with $10.9 billion taken from high-yield bonds alone, the second highest outflow on record.

Investment-grade bond funds also weren’t spared, with $2 billion of redemptions ending a 59-week streak of inflows, BofA reported.

The iShares LQD Investment Grade Corporate Bond ETF posted a record one-day outflow Wednesday, the most among U.S.-listed passive vehicles across asset classes.

Separately, a report from Lipper confirmed the bond exodus, as investors pulled $6.3 billion from high yield bond funds for week ended Feb 14, the second biggest weekly outflow on record, and the fifth straight week of outflows, with the total over that period rising to $15 billion according to Bloomberg. The biggest outflow on record was $7.06b in August 2014.

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