Investor Flows – Risk-On, but Rising Liquidity Risks a Concern

Investors maintain risk-on flows despite equity markets suffering 2+% losses to close out the week. Broad, large cap funds remain the destination of choice over sector-specific exposure. Nearly 55% of all in-flows over the past month have been directed into the likes of SPY and QQQ.

Inflation protection continues to command the largest share of safe asset flows, while corporate bonds struggle to find any buyers. We are keeping a very close eye on global liquidity and solvency risks breaking out to the upside.

Investors have been favoring defensives over cyclicals, which have failed to garner flows like the first half of the year.

US high yield corporates’ (e.g. HYG) implied volatility jumped to the highest since March 2021, coinciding with the largest rolling five-day outlooks at $-2.5 billion since October 2020. Global liquidity and solvency risks have broken out to upside, which will likely keep a lid on any flows back into corporates.

Inflation-friendly assets maintain a strong pace of rolling five-day in-flows near $2.05 billion, helped by TIPS at $1.32 billion. 

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