Bond Sales Fall to Lowest Point in a Decade, but Flight to Quality Remains

High-yield volatility distorts larger fixed income picture

Bond sales have fallen to their lowest point in a decade due to continued concerns over just how far the European sovereign debt crisis will drive up borrowing costs.

Borrowers issued $66.1 billion of debt in currencies from dollars to yen, a third of April's tally and the least since December 2000, according to data compiled by Bloomberg. The news service reports at least 14 companies withdrew offerings, including New York-based retailer Jones Apparel Group Inc. and theater chain operator Regal Entertainment Group.

While concerns over the situation in Europe would dictate a "flight to quality," which includes bonds, the news indicates the exact opposite is happening. Not so, says Don Mykrantz, head of fixed income with MFS Investment Management.

"What you're seeing is a flight to quality from high-yield fixed income products, which makes sense," he explains.

According to Mykrantz, the first step in a panic situation is to skip over fixed income and go right to money markets, which is what happened at this time last year. At the height of the panic, $4 trillion was moved to money markets, which subsequently fell to $3 trillion as the economy improved.

Currently, money is flowing out of high-yield products with little going in, accounting for a fall-off in bond sales. This is overshadowing sales in higher quality fixed income products, says Mykrantz, which are still robust.

"If you look at it strictly by asset class, the most volatile in terms of in-flows and outflows will always be high-yield products," he adds. "Since the high-yield fixed income market is predominantly a U.S. market, it will disproportionately affect fixed income flows here in the states, which aren't always the most accurate picture."

John Sullivan is editor-in-chief of Boomer Market Advisor and Advisorbiz.com.

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