Salient to Investors:

As high-yield ETFs suffer unprecedented withdrawals, the combined value of the 5 biggest fell 7 percent in January.

Peter Tchir at TF Market Advisors said a pullback 3 times bigger than for mutual funds suggests hedge funds et al are cherry picking rather than investing in the broader market. Tchir said institutions are moving away from indexes into smaller issuers or those that don’t fit the indices particularly well as they see the diminishing potential returns for the broader market.

Morgan Stanley predicts junk debt will return 3.1 percent in 2013, less than its coupon.

Dan Fuss at Loomis Sayles said last month that junk debt was as overbought as he’d ever seen. Howard Marks at Oaktree Capital Mgmt and others have said that market prices are too high. Bonnie Baha at DoubleLine Capital said everyone agrees that valuations are ridiculous yet money has continued to flow into the sector.

Oleg Melentyev at Bank of America said the high-yield rally was overextended going into January, and the hottest trend-chasing money is exiting – this pullback signifies how unstable the market is at current valuations.

Stephen Antczak at Citigroup said mutual funds and ETFs have been among the largest buyers of corporate bonds in recent years making the corporate bond market more vulnerable to losses accelerated by outflows when US Treasury rates rise because these investors tend to be backward-looking and sensitive to total returns, particularly negative total returns.

Eric Beinstein at JPMorgan said the disproportionate outflows between ETFs and mutual funds shows that the funds truly are fast money and could leave quickly.

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