With dollar weakness complicating the investment case for U.S. fixed income assets, flows to U.S. Bond Funds were close to neutral going into March as investors pulled back from all the major groups except Emerging Markets Hard Currency Bond Funds and waited for the next round of major central bank meetings. Those kick off during the coming week as policymakers from the Bank of Japan, European Central Bank, Bank of England and Reserve Bank of Australia convene.
At the asset class level, Inflation Protected Bond Funds recorded their first outflow since mid-October and redemptions from Municipal Bond Funds hit levels last seen in late 4Q16. Investors also pulled money out of High Yield Bond Funds for the seventh straight week despite predictions by ratings agency Moody’s that the default rate for U.S. junk bonds will fall from the current two-year low to 2 percent by the end of 2018 while the rate for Asian high yield issues will more than halve to 1.7 percent.
In analyzing the complications created by the U.S. dollar’s recent weakness in spite of rising interest rates, which increases the hedging costs for overseas investors holding U.S. assets, Informa Financial Intelligence’s Chief Macro Strategist David Ader believes the underlying cause is straightforward. In his latest note to clients, Ader observes that, “between the specific threats on the trade front and the [administration’s] blasé willingness to put in plans that means a $1 trillion budget deficit in 2019, the offset to pure interest-rate differentials starts to make some logical sense.”
For the second week running, Intermediate Term Blend Funds recorded the biggest inflows among the U.S. Bond Fund groups while all three of the dedicated investment grade Corporate Bond Fund groups by duration posted outflows ranging from 0.05 percent to 1.05 percent of assets under management. Foreign currency-denominated flows to all U.S. Bond Funds, meanwhile, were negative for the 19th straight week.
Investors looking to North America showed more enthusiasm for the U.S.’s northern neighbor, with Canada Bond Funds chalking up their biggest inflow since early June of 2016.
Strong flows to Emerging Markets Hard Currency Bond Funds offset redemptions from funds with local currency mandates, allowing Emerging Markets Bond Funds as a whole to post inflows for the 55th time in the 61 weeks since the start of 2017. The latest allocations data from the diversified Global Emerging Markets (GEM) Bond Funds, which absorbed the bulk of the week’s inflows, shows allocations for Indonesia and Mexico are at the lowest levels since 4Q15 and 3Q08 while South Africa and China’s weightings are at nine- and 32-month highs, respectively.
Among Europe Country Bond Fund groups, Italy Bond Funds stood out by recording their largest weekly inflow since late 4Q16. That inflow in December of 2016 was followed by outflows 48 of the subsequent 52 weeks.