EPFR-tracked Bond Funds collectively posted their second largest outflow year-to-date—and second largest since the beginning of 2017—ahead of what is expected to be the seventh 0.25% rate hike in the current US tightening cycle.
That, allied to concerns about US issuance and the possibility that Italy's populist government could trigger another Eurozone crisis with its spending plans, saw all of the major geographic Bond Fund groups post outflows during the week ending June 6.
Emerging Markets Bond Funds extended their longest run of outflows since the last quarter of 2016 and redemptions from Global Bond Funds hit levels last seen in mid-2016.
Expectations of above trend US growth during the second quarter of 2018 prompted many investors to pencil in higher inflation and three more US rate hikes this year. Bank Loan Funds, often seeing as a way to play rising interest rates, absorbed fresh money for the 15th straight week and US Inflation Protected Bond Funds recorded their biggest inflow since the fourth quarter of 2016.
The first week of June saw US Short Term Government Bond Funds record their biggest outflow in 71 weeks as a 13-week inflow streak came to an end and investors rotated to funds with intermediate term mandates.
Among the Emerging Markets Bond Fund groups, those with local currency mandates posted their largest outflow in over 18 months. Currency weakness in key markets is prompting investors to redeem investments before their value in hard currencies falls further.
But China, whose currency has proved resilient, continues to stand out. China Bond Funds recorded their biggest inflow since the third quarter of 2016 as they took in fresh money for the 10th week running.
Europe Bond Funds chalked up their third consecutive outflow as investors tried to make sense of Italian politics, slowing growth and the European Central Bank's plans to end its current quantitative easing program later this year. The confidence expressed by the European Central Bank's chief economist—that inflation is heading towards the central bank's 2% target—is not reflected in the latest Europe Inflation Protected Bond Fund flows. This fund group recorded its biggest outflow since the middle of 2011. Flows to Italy Bond Funds, meanwhile, hit their highest level since the third quarter of 2016, suggesting that some investors believe the ECB will still be back-stopping the Eurozone's sovereign bond market in early 2019.
Cameron Brandt is Director of Research for EPFR Global, an Informa Financial Intelligence company.