Credit investors have piled into defensive positions by shifting out of riskier areas of the debt markets over the past month, as worries over AI disruption and the war in the Middle East persist.
Investors pulled an average of $2.7bn a week from US junk bond funds over the past month, a more than 24-fold increase from the four weeks prior, according to data compiled by JPMorgan. The asset class lost nearly $14bn this year.
Leveraged loans, which are exposed to the beleaguered software sector, saw $602mn of weekly average outflows during the same period, compared to $263mn in the prior month, JPMorgan data shows.
“We’re being a little bit more cautious and risk-off in the current environment,” said Ali Hassan, portfolio manager at Thornburg Investment Management, which is reducing holdings of high-yield debt while buying more Treasuries and investment-grade debt.
The flight to safety has contributed to more than $3.1bn of average weekly inflows for high-grade bonds during the period, according to JPMorgan.
Rising Treasury yields and widening credit spreads — the premium borrowers pay over US Treasuries — pushed total yields on investment-grade corporate bonds to 5.15 per cent by the end of March. That was up from 4.7 per cent from a month ago, according to Ice BofA data.
“The high-quality part of the corporate bond market has been very resilient despite all the volatility in other corners of the market,” said Matt Walker, senior portfolio manager at Income Research + Management. “People find the total returns very attractive.”
Some investors have also allocated more capital to cash and short-term securities to build up buffers.
“It’s always good to add to the cash-allocation cushion in times of financial markets uncertainty,” said Sanjay Chawla, chief investment officer of insurance group FM.
“Given that we’re not in the zero per cent or low-rates environment, you’re better off having a higher cash allocation for a little bit longer until you have better visibility.”
The risk-off sentiment has put new deals in the junk-grade market under pressure. Customer service software group Qualtrics halted more than $5bn of debt sales in March as AI fears damped investor appetite.
This week, packaging company Sealed Air offered sweetened terms and pricing to get its $7.2bn debt offering across the finish line, partly due to concerns about rising business costs amid elevated oil prices.
Hamza Lemssouguer, founder of credit investment firm Arini Capital, said a number of fund managers had been sitting out new deals, complicating bankers’ efforts to finance leveraged buyouts.
Lemssouguer noted the advance of AI had cooled enthusiasm for new software debt and that the war in the Middle East would pressure margins for businesses that consume commodities in the chemicals and packaging space.
Despite the current volatility and heightened uncertainty, high-yield bonds are down just 0.6 per cent this year, according to the Ice BofA index. A subset of riskier debt rated single-B, a rating often targeted by private equity shops as they structure new buyouts, is off 0.4 per cent.
“I would not take comfort just because the market is not reflecting the pain,” Lemssouguer added. “Once liquidity is exhausted, prices will begin to drop.”
Investors are also worried about the weakening US labour market and cracks in private lending.
“These issues have been somewhat covered up behind the fog of this war,” said George Catrambone, head of fixed income Americas at DWS Group, which favours sectors including energy and utilities.
In a sign of investors demanding greater compensation for the risk of default on lower-quality debt, the average spread for US high-yield bonds grew to 3.46 percentage points on Monday, its widest level since May 2025. Total yield stood at more than 7.4 per cent at the end of March, Ice BofA data shows.
Still, some investors are unswayed, arguing the current yield on junk bonds is insufficient given ongoing risks, such as potential war-induced inflation, that could reverse the rate-cutting trajectory. If interest rates increase, debt issued at lower rates becomes less attractive.
“There’s a lot of uncertainty building out there that we don’t think we’re being compensated for,” said Dan Carter, senior portfolio manager at Fort Washington Investment Advisors. “We’ve moved up in quality in our portfolios.”
Carter said he had reduced high-yield bond holdings and added high-grade bonds, such as those issued by major US banks, particularly subordinated notes from highly rated companies that offer extra yields.
“We like boring names in times of volatility,” Carter said.
Additional reporting by Harriet Clarfelt
