Despite federal funds futures showing a 55 percent chance of four U.S. interest rate hikes this year, a strengthening dollar and rising inflation expectations tied to higher oil prices, EPFR-tracked Bond Funds posted collective inflows during the week ending May 16 as U.S. Bond Funds took in fresh money for the seventh straight week. Investors continue to pull money out of Emerging Markets, Asia Pacific and Global Bond Funds, albeit at a slower pace than the previous two weeks, while Europe Bond Funds recorded inflows for a second straight week.
With expectations for inflation in the U.S. nudging 3 percent, Inflation Protected Bond Funds recorded their largest inflow since the second week of March. Since higher inflation is likely to translate into higher interest rates and more attractive returns for holders of U.S. Treasurys, High Yield Bond Funds surrendered over $1 billion for the second straight week. High-yield ETFs did, however, record modest inflows as the relatively low returns this asset class is offering prompt them to sidestep the higher fees associated with active management.
Collectively, U.S. Bond Funds took in fresh money for the 16th week year-to-date although foreign currency-denominated flows were negative for the 18th time. Expectations of future rate hikes weighed on the mind of investors during the week, with money rotating out of Long Term Bond Funds and into Short Term Bond Funds. Flows to Bank Loan Bond Funds, which offer a hedge against interest rate risk, were positive for the 12th straight week and were the biggest in over a year.
Europe Bond Funds attracted fresh money despite the possibility of an anti-establishment government taking over in Italy. For the second straight week Italy Bond Funds posted outflows, but it was Spain Bond Funds that experienced the biggest net redemptions among the Europe Country Fund groups. Flows into Europe Investment Grade Corporate Bond Funds accelerated for the third straight week, hitting their highest level since mid-December.
The tough times for Emerging Market Bond Funds continued, with redemptions exceeding the $1 billion mark for the third straight week. EMEA Bond Funds were the lone regional group to post inflows going into the second half of May. At the country level, India Bond Funds have now posted inflows for 12 of the past 13 weeks, while flows into Malaysia Bond Funds were flat following Mahathir Mohamad’s unexpected election victory earlier this month.