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Dueling Bond Markets Send Mixed Message on Risk

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06/14/2019 | 05:14pm EDT

By Matt Wirz

U.S. bond markets sent mixed signals about risk this week as investors jumped back into funds that buy risky corporate debt, while Treasury bond yields hovered near record lows, reflecting concerns about slowing economic growth.

The decline in Treasury yields, which fall when prices rise, may be the more meaningful indicator as analysts are also raising forecasts for corporate defaults in the coming year.

Investors poured $1.7 billion into mutual funds and exchange-traded funds that buy junk-rated corporate bonds in the week ending June 12, the first net inflow into the asset class in eight weeks and the largest influx since April 3, according to data from Lipper.

The reversal followed $7 billion of outflows in the past two months that lifted yields of the Bank of America U.S. High Yield index to 6.63% in early June from 6.1% in April. The wave of buying in recent days pushed yields of the index back to 6.3% this week.

Despite recovering appetite for high-yielding debt, and a jump in U.S. retail sales, Treasury bond yields remain anchored below 2.1% this week, down from 3.23% in November. Persistently low Treasury yields indicate that investors globally are still betting on sluggish growth and a continuation of dovish interest-rate policy from the U.S. Federal Reserve.

Rising default expectations also point toward a potential slowdown in economic activity.

Based on defaults in the first half of the year, the annualized default rate in U.S. high yield is about 4.3%, according to data from Bank of America Corp. That is a sharp jump from the 2.8% rate in November and is the highest level for the risk measure since 2016, when collapsing oil prices sparked a selloff across debt markets and a spike in defaults by energy companies.

Ratings firm Moody's Investors Service almost doubled its one-year global default forecast for high-yield debt to 2.4% this week, up from a 1.3% forecast a month earlier. It was the second such increase by Moody's this year, and the firm said it expects continued volatility in its default predictions based on uncertainty about trade relations and how the Fed will respond to future economic data.

The 10-year U.S. Treasury note yield fell to as low as 2.079% Friday when a monthly survey of consumer expectations forecasted a decline in inflation rates, before rebounding to 2.093%. The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, rose to 90.78 from 90.43 Thursday.

Write to Matt Wirz at matthieu.wirz@wsj.com

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