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FUND FLOWS: Bond Funds Continue Inflows Amid Outlook for U.S. Rate Hikes

The Fed has shifted from a data-dependent outlook to forecast-dependent, but that may not last, says Informa Financial Intelligence Chief Macro Strategist David Ader.

EPFR Global-tracked Bond Funds ended the third week in May having posted inflows for the 19th time in 20 weeks as investors continue to pump fresh money into U.S., Emerging Markets and Global Bond Funds, reassess the case for Europe Bond Funds and question the outlook for further U.S. interest rate hikes.

Although markets are currently pricing in a nearly 90 percent chance of another U.S. rate hike in June, flows to Bank Loan Funds — a play on rising rates — remain subdued and Inflation Protected Bond Funds recorded outflows for the fifth time in the past seven weeks. But, while Informa Financial Intelligence Chief Macro Strategist David Ader believes investors are right to discount inflation, which is normally a key data point in any interest rate deliberations, he believes they would be unwise to assume this will stay the Federal Open Markets Committee’s hand.

According to Ader, there has been a marked shift in the FOMC’s attitude. “For most of the post crisis period into and out of the first hike, they’ve been cautious in their views to the hiking cycle. Data-dependent was the key phrase. Now that their own predictions of wage gains and labor tightness appear to be trumping average GDP gain of 1.6 percent over the last six quarters, the Fed is sounding forecast-dependent.”

Expectations of another rate U.S. rate hike by the end of this quarter have yet to dent flows into Emerging Markets Bond Funds, with the latest week’s influx taking the 2017 total up to $34 billion. That is within striking distance of last year’s intake of $39 billion. Funds with hard currency mandates again outgained their local currency counterparts by a more the 2-to-1 margin.

At the corporate level Latin America Corporate Bond Funds recorded the biggest outflows among the major regional groups. Research by EPFR Global sister company Informa Global Markets (IGM) shows Argentina leading when it comes to primary issuance by country in the region (see chart below) while, at the industry level, oil and gas plays have raised three times as much as second placed transportation issuers.

Europe Bond Funds recorded net inflows for the third week running with investors taking on more single country exposure. Inflows to both France and Norway Bond Funds hit multiweek highs and flows to U.K. and Switzerland Bond Funds were solid. However, redemptions from Italy Bond Funds were the biggest on record, reflecting investor concern about that country’s large debt-to-GDP ratio, stubbornly high levels of nonperforming bank loans and weak economic growth.

Balanced Funds, one of the two major multi-asset groups, extended their longest inflow streak since early in the second quarter of 2016. The other group, Total Return Bond Funds, last posted outflows in late January.

Cameron Brandt is Director of Research for EPFR Global, an Informa Financial Intelligence company.

TAGS: Mutual Funds
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