US high yield (HY) bond funds are drawing large amounts of cash, as investors bet that the Fed will decelerate rate hikes in order to avoid an economic slowdown. This comes in stark contrast to the constant withdrawals in the first half of the year, totaling $52.25bn. Reuters notes that investors are looking to capitalize on widening spreads of 452bp, and gain exposure to HY bonds at steeper discounts. According to Refinitiv data, US HY bond funds saw inflows of $4.8bn in July, the first monthly net inflow of the year.

Based on CreditSights data, the US HY distress ratio, a measure of risk in the bond market, also decreased from 15.2% in June to 10.6%, which is a good indicator of falling default rates. Despite this, some investors are still cautious. Thomas Samuelson, chief investment officer at Vineyard Global Advisors said, “High-yield bond funds are getting inflows due to enthusiasm that the US economy will avoid a recession or, if it does have one, that it will be mild…We are maintaining our underweight position on high-yield bonds until we see more evidence that the Fed is closer to the end of its tightening cycle and the risk of a recession subsides.”

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