The odds of the next U.S. rate hike being in 1Q17 rather than 2Q17 may, in the markets opinion, have abruptly shortened. Yet, flows into EPFR Global-tracked Bond Funds during the final week of February kept their recent shape. Once again investors pumped fresh money into U.S., Global and Emerging Markets Bond Funds and redeemed it from Asia Pacific and Europe Bond Funds. At the asset class level Bank Loan, High Yield, Total Return and Inflation Protected Bond Funds extended their current inflow streaks.
Towards the end of the week, fixed income investors were also factoring in the possibility that the more inclusive, pragmatic side U.S. President Donald Trump showed during his state-of-the union address will help him get more of his economic agenda through Congress—and at a quicker pace—than seemed likely even a week ago. If he does, the odds of the U.S. Federal Reserve tightening at least three times this year will also shorten. Flows for Municipal Bond Funds turned negative again and Emerging Markets Local Currency Bond Funds posted outflows for only the second time YTD with the bulk of those redemptions occurring on the final day of the reporting period.
Although Europe Bond Funds recorded outflows for a sixth straight week the headline number was a relatively modest $177 million with Europe Regional Bond Funds seeing the heaviest redemptions. Investors are still wary of direct exposure to Eurozone markets, with Spain and Italy Bond Funds both seeing around 1% of AUM redeemed while flows into U.K. and Sweden Bond Funds hit 11 and 12-week highs respectively, showing a marked preference for funds with corporate rather than sovereign mandates.
The latest allocations data for Global Bond Funds, which have taken in a net $12.6 billion so far this year, shows their average exposure to the U.K. at its highest level since 3Q09, while France’s allocation is close to the seven-year high reached late last year.
Among the U.S. Bond Funds, sub-groups Intermediate Term Blend Funds posted the biggest inflows in cash terms and Long Term Blend Funds inflows as a % of AUM terms. Long Term U.S. Government Bond Funds recorded the biggest redemptions by both measures.
Emerging Markets Bond Funds ended the week with their fifth consecutive inflow despite the first retail redemptions since late January as Hard Currency EM Funds absorbed fresh money for the 10th consecutive week. Funds with intermediate term mandates (4-6 years) recorded their biggest inflow since mid-3Q16.