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Markets are pricing in bets that U.S. interest rates will peak at 5 per cent next June before starting to fall, having previously registered as high as 5.3 per cent.Seth Wenig/The Associated Press

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Investors have poured almost US$16-billion into U.S. corporate bond funds this month, underscoring how signs of easing inflation have helped brighten sentiment after a brutal sell-off in much of 2022.

Funds holding high-grade bonds have garnered US$8.6-billion of new client money in the month to Nov. 23, while those focused on riskier junk-rated debt have posted net inflows of US$7.1-billion. The combined figure is set to be the highest monthly inflow since July 2020 if the trend holds in the final week of November, according to data provider Emerging Portfolio Fund Research (EPFR).

The surge of inflows into credit funds comes as Wall Street markets have staged a late-year rally after data released earlier in November showed the pace of consumer price growth has started to ease, prompting hopes the Federal Reserve Board may soon slow down its aggressive interest rate rises.

Almost US$5-billion had flowed into U.S. corporate bond funds before the release of the consumer price index report on Nov. 10, but a further US$10.9-billion shifted into the vehicles in the fortnight that followed, EPFR data show. Corporate bonds have also rallied following the inflation report, with an ICE Data Services index tracking high-grade debt up 4.6 per cent, trimming the 2022 fall to about 15 per cent.

Many companies took advantage of cheap money during the stimulus-infused depths of the pandemic to refinance and issue new debt. However, the Fed has since led the charge on tightening monetary policy to curb inflation – taking U.S. interest rates from near zero to a target range of 3.75 to 4 per cent.

In turn, concerns have intensified that the central bank and its peers will twist the screws into a recession, crimping consumer spending just as businesses face much higher borrowing costs.

The consumer price index report, which showed the annual rate of inflation cooled to 7.7 per cent in October from a high of 9.1 per cent in June, has helped to provide at least a glimmer of hope that rate increases may start to slow.

Markets are pricing in bets that U.S. interest rates will peak at 5 per cent next June before starting to fall, having previously registered as high as 5.3 per cent.

“I think the investors are saying ...’rates are going down rather than up, so I want to be in sooner rather than later,” says Marty Fridson, chief investment officer at Lehmann Livian Fridson Advisors LLC.

Mr. Fridson says some investors may be keen to lock in higher yields after this year’s sell-off sent them soaring. The average yield on the ICE index of high-grade corporate bonds is 5.4 per cent, down from an October peak of more than 6 per cent, but well above the 2.4 per cent from the end of 2021.

Still, November’s upbeat fund flow data are a drop in the ocean of exits from risky U.S. corporate bond vehicles since early January. Almost US$52-billion has leaked out of high-yield funds so far in 2022. Tempered by net inflows for high-grade debt, overall outflows stand at US$44-billion year-to-date.

Cameron Brandt, research director at EPFR, cautions that “there’s a fairly high degree of irrational optimism generated by the still rather uncomfortable number for U.S. inflation in October.

“There’s a pool of investors who have been trudging through a yield-starved environment for the better part of a decade,” he adds.

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