This Week's Data On Fund Flows Contain A New Disturbing Signal

Flows into equity funds totaled $6.6 billion in the first week of February. January's historic inflows averaged $13.5 billion a week, but this isn't really a strong signal that flows into mutual funds and ETFs investing in stocks are slowing down.

However, there are two other observations from this week's flow data that could be concerning for investors in risk assets.

This week, U.S. Treasury funds recorded their first inflows – $0.5 billion – after 10 straight weeks of outflows, totaling about $6 billion.

This week's gains in the Treasury fund space obviously don't make up for the $6 billion that have flowed out of those funds in recent weeks, but the fact that they didn't suffer outflows this week is evident of a risk reversal nonetheless, says BofA strategist Michael Hartnett.

The data on high-yield debt flows offer much more striking evidence of a risk reversal, as the chart below shows (via Zero Hedge).

This week, high-yield ETFs recorded their largest weekly outflows ever.

Zero interest rate policy has depressed yields in safer bonds, like investment grade and government debt, causing investors searching for interest income to move further out on the risk spectrum – arriving at the high-yield bond market.

As such, high-yield is one of the first places you would expect to see a breakdown in a risk rally, and that appears to have happened pretty swiftly this week.

Credit strategist Peter Tchir recently wrote an excellent, inside look at high-yield ETFs specifically, and why self-enforcing feedback loops in those funds pose so much risk in the event of a selloff (Bond ETFs Are A Massive Accident Waiting To Happen).

It will be very interesting to keep an eye on the data in the next few weeks to see whether or not the move out of high-yield reverses, and whether the negative sentiment infects the equity space.