Investors shun high yield, U.S. and emerging markets as Fed hike looms: BAML

[December 11, 2015]    By Jamie McGeever

LONDON (Reuters) - The "Great Divide" between U.S. and euro zone monetary policy dictated financial market flows last week as investors bailed out of high-yield bonds and emerging markets, and piled into cash and European stocks, Bank of America Merrill Lynch said on Friday.

The Federal Reserve is widely expected to raise U.S. interest rates next week for the first time since June 2006, while the European Central Bank last week loosened policy further, although not as aggressively as many had expected.

The $3.8 billion outflow from high yield "junk" bond funds in the week to Dec. 9 was the largest in 15 weeks, while the effective yield on U.S. high yield bonds jumped to 17 percent, the highest in at least five years, BAML said.

The prospect of rising U.S. rates and another lurch lower in oil and commodity prices prompted more selling of emerging market (EM) assets.

Investors pulled $1.0 billion out of EM debt funds, the 19th outflow in 20 weeks, and withdrew $1.7 billion from EM equity funds, the sixth consecutive outflow. A net $69.9 billion has left EM equity funds this year, BAML said.

Investors also pulled $9.2 billion from U.S. equity funds, the biggest in 13 weeks.

The flip side was another wave of inflows into cash and European stocks, according to BAML, whose figures also include data from data provider EPFR.

Money market funds attracted $13.4 billion, the 10th weekly inflow in a row, the longest streak since March 2008.

The $3.5 billion net inflow into European equity funds was the largest in 14 weeks, and was the 28th inflow out of the last 30 weeks, BAML said.

Developed market equity funds have attracted a net $99 billion so far this year, but the contrast between Europe and the United States could not be greater: European funds +$118.7 billion, U.S. funds -$133.3 billion.

(Reporting by Jamie McGeever; Editing by Mark Potter)

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