Junk Bond Funds Just Experienced A 6-Sigma Event

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Junk Bond Funds Just Experienced A 6-Sigma Event

High-yield bond mutual funds saw outflows total an eye-popping $7.1 billion last week.

"HY flowmageddon," said Goldman Sachs' Charles Himmelberg in a research note we saw via @lebullmarche. "This is the largest HY outflow on record – a 6-sigma event when flows are scaled by mutual fund assets under management!"

Sigma is another way of saying standard deviation. And the greater the number of standard deviations, the more unlikely the event.

A 6-sigma event is extremely rare. If you want to put a number to it, think 1 in 500 million. According to Business Insider quant reporter Andy Kiersz, it's like flipping a coin 29 times in a row and getting heads each time. It's like rolling a die 11 times in a row and getting 6 each time.

"High-yield is less overvalued," said Doubleline Funds' Jeffrey Gundlach in a phone call with Business Insider on Friday.

Gundlach stopped short of saying high-yield looked attractive. Himmelberg didn't.

"Our confidence in the buying opportunity in the face of retail selling stems from our belief that credit fundamentals remain supportive, while valuations are now more attractive," Himmelberg said. "Unlike the muni market (where institutional liquidity providers are few), the corporate market has a deep bench of investors who are responsive to value. This is one reason we have long argued that dislocations caused by retail selling present more opportunity than risk."

"[T]he U.S. high yield house is not burning down," said UBS's Matthew Mish. "The real panic will come with a more severe downturn in credit and economic fundamentals, which will likely trigger an exodus from non-institutional and crossover/tourists from U.S. high yield. That moment is unlikely to be a 2014 event."

This is not to say the outflows and price declines will end anytime soon.

"Given the outstanding concerns around rate, credit, and liquidity risks, some will simply choose to exit early – the tack some investors are clearly embracing," Mish said. "How far it extends is anyone's guess, but the run continues and the negative headlines seem unlikely to abate over the near term." Read »