By Cameron Brandt
EPFR Global-tracked Bond Funds continued to soak up fresh money in early May as investors discounted the U.S. reflation story, penciled in Emmanuel Macron as France’s next president and played catch-up with emerging markets debt. Europe Bond Funds posted their second largest inflow year-to-date, Emerging Markets Bond Funds took in over $2 billion for the sixth time in the past seven weeks, Global Bond Funds extended their current inflow streak to 16 straight weeks and year-to-date flows into U.S. Bond Funds moved within striking distance of the $140 billion mark.
Emerging Market Bond Funds have now posted inflows for 14 straight weeks, with diversified funds again attracting the bulk of the new money. At the country level Colombia, Korea, India and Thailand Bond Funds stood out during a week when flows into funds with local currency mandates hit a one-month high.
Flows into Europe Bond Funds were boosted by the ECB’s decision to leave its current policies unchanged and its assertion, voiced by its ECB President Mario Draghi, that winding down its quantitative program has yet to be discussed. Investors steered clear of exposure to U.K. debt, with Europe ex-U.K. Regional Bond Funds recording their biggest inflow since the third quarter of 2016 and redemptions from U.K. Bond Funds hitting their highest level since mid-November.
U.S. Bond Funds recorded solid inflows despite the Fed’s assertion that economic conditions in the U.S. support further tightening and Puerto Rico’s de facto bankruptcy filing. Short Term Bond Funds attracted the biggest inflows in cash terms and Long Term Bond Funds in percentage of AUM terms. Puerto Rico’s move, which puts some $70 billion worth of municipal debt at risk of a "haircut," is the latest headwind for Municipal Bond Funds which have also been dealing with — and, in March and April, overcoming — the uncertainty surrounding the Trump administration’s tax reform plans and the prospect of higher U.S. interest rates.
The odds of another U.S. interest rate hike in June have narrowed sharply but, according to Informa Financial Intelligence Chief Macro Strategist David Ader, the rationale for further hikes rest on shaky ground.
“The [latest] FOMC meeting drove the odds of a hike in June from about 67 percent at the start of the week to 97.5 percent after the meeting itself,” wrote Ader in a recent note. “What is striking isn’t that the Fed wants to hike — they’ve been saying that for years — but that seems less sensitive to the breadth of economic data and more narrowly focused on the labor markets. After [all,] did we not just see headline inflation drop 0.2 percent in March and core inflation slip 0.1 percent for a 1.6 percent year-over-year gain?”
Inflation Protected Bond Fund flows reflected this shift in the outlook for prices, with investors pulling money out for the third week running.
Cameron Brandt is Director of Research for EPFR Global, an Informa Financial Intelligence company.