Weekly Fund Flows

A expected credit posted inflows across the board, small easing in $IG but strong pick up in $HY while €IG/HY saw similar inflows to last week. Only exception was £IG which faced slight outflows - we've seen no impact of that in spreads & issuance has remained tempered. US govvie inflows continued Euro govvies reversing to inflows as well while equities (US & China) continued seeing inflows.

€IG is again skewed tighter this morning after yesterday's -3.6bp close - the largest move since late last year and leaves spreads -19bps this yr & excess returns above 1% - only 2 years over the last decade we've seen better returns for spreads - an impressive feat given outright levels this year are lower (i.e. less spread carry) & strong easing in FI conditions that was the backdrop in those years absent to start this year. Fins (vs. corp's), € (vs. $) & cash (vs. CDS) outperformance continuing themes.

The narrative that yield buyers continue to come in while spread investors are left uneasy at tights is somewhat misleading we think. Spread investors, who have outperformed yield investors YTD, may still be in a better position - spread carry/breakevens at 26bps (annual) are lower but still above the ~20bp avg. we saw pre-covid. Granted in contrast yield breaks have moved higher but this has only boosted carry - not roll-down - the rates curve is continuing to invert on front-end driven repricing (2s5s -10bps, 5s10s -8bps) & has pushed credit yield curves flatter - eventual rates curve steepening will be the pain point for yield investors - potentially eating into (perceived) attractive carry.

On the flipside the spread curve (in €IG) has been steepening YTD (+10bps) & is helping roll-down prospects for spread investors. EPS growth for the year ahead has been met through Q4 earnings guidance (despite the high growth bar that was baked into consensus - +26% for Stoxx FY24 adj. EPS) & all in the face of only a small increase in leverage & earnings that have kept a lid on the extent of ICR increases (In IG ~within historical ranges).