The prospect of higher U.S. interest rates influenced EPFR-tracked Bond Funds flows strongly during the week ending May 2, with investors cutting their exposure to all regions outside the United States. Redemptions from Global and Emerging Markets Bond Funds hit 10- and 11-week highs, respectively. Asia Pacific Bond Funds posted outflows for the 11th straight week and Europe Bond Funds saw $300 million redeemed.
Highlighting this newfound desire to avoid fighting the Fed and the implications of its tightening bias is the popularity of U.S. Government Bond Funds. According to EPFR sister company TrimTabs Investment Research, “Fund flows suggest institutional investors were dialing back risk pretty aggressively in April. Moreover, the flow winners were Treasury funds even though they delivered the worst performance of any major bond category ...Treasury bond ETFs hauled in over $6 billion, the biggest inflow since January 2016, with inflows on all but one trading day.”
Flows to U.S. Bond Funds again favored those with short duration (0 to 4 years) mandates. Short Term Mixed Funds recorded the week’s biggest inflow in cash terms and Short Term U.S. Government Bond Funds inflows as a percent of assets under management terms. Retail investors were net redeemers from U.S. Bond Funds for the sixth consecutive week and foreign currency-denominated flows were negative for the 23rd time in the past 25 weeks.
A tough week for Emerging Markets Bond Funds saw over $1 billion flow out of those with hard currency mandates and EM High Yield Bond Funds post their eighth consecutive outflow. Swimming against the general tide, however, were China Bond Funds, which extended their longest inflow streak since 4Q14 as investor commitments hit an 11-week high. Some of that reflects growing use of the “bond connect” framework established last year to boost foreign participation and some is due to the need of domestic investors to find a home for money, which is harder to send overseas or park in high-yielding but unregulated wealth management products. Diversified fund managers are more cautious: China's allocation among Asia ex-Japan Bond Funds, which peaked in 4Q15 at over 31 percent, has been holding around the 25 percent level for the past two years.
Investors pulled money out of Europe Bond Funds for the second week running on the heels of the European Central Bank’s April policy meeting. Fears that rising U.S. interest rates will begin to pull European yields higher and expectations that the ECB will wrap up its current quantitative easing program this year are prompting a reassessment of the current risk/reward balance, especially given the tightening of spreads this year between core and peripheral eurozone sovereign issuers.
Appetite for multi-asset exposure has rebounded, with flows into Total Return Bond Funds climbing to a nine-week high and Balanced Funds recording their fourth inflow in the past five weeks.