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FUND FLOWS: Fixed Income Investors Favor Emerging Markets, Bank Loans

For the second week in April, bond funds with geographically diverse and investment grade mandates fared best, while those focused on Europe continue to lose money.

Except for those dedicated to Europe, Bond Funds with geographically diversified and investment grade mandates fared best during the week ending April 12, as fixed income investors responded to geopolitical events, less bullish assessments of the fiscal stimulus the U.S. economy can expect this year and signals the Federal Reserve is serious about trimming its balance sheet. Emerging Markets Bond Funds took in over $2 billion for the fourth straight week, Global Bond Funds extended their longest inflow streak since 1H15 and U.S. Municipal Bond Funds absorbed over $1.5 billion.

At the asset class level Bank Loan Funds took in fresh money for the 21st week in a row, High Yield Bond Funds experienced net redemptions for the fourth time in the past six weeks and Inflation Protected Bond Funds narrowly missed posting consecutive weekly outflows for the first time since early December as flows into funds with global mandates narrowly offset redemptions from U.S. and Europe Inflation Protected Bond Funds.

Among Emerging Markets Bond Funds, both Hard and Local Currency Funds absorbed over $1 billion for the second week running. At the country level Thailand Bond Funds recorded strong inflows and Russia Bond Funds extended an inflow streak stretching back to early November. Managers of the diversified GEM Bond Funds have been slower to warm to Russia, with allocations still climbing slowly away from the low point they touched in early 2015.

Europe Bond Funds, which snapped a three-week run of outflows the previous week, saw flows turn negative again as investors translated the warmth equity investors have been showing towards the region’s growth and earnings stories into greater scope for the European Central Bank to start winding down its current quantitative easing program. Redemptions from Europe Investment Grade Corporate Bond Funds accounted for roughly half the headline number for all funds.

Allocations to Europe by Global Bond Funds strongly favor the U.K. with the average exposure running around 9.2 percent versus 5.3 percent for France, the market with the second biggest weighting. Flows into Global Bond Funds have been robust so far this year, totaling over $28 billion.

Among U.S. Bond Fund groups those dedicated the municipal debt stood out during the second week of April, as investors contemplated their 2016 tax bills and the possibility of comprehensive tax reform later this year. The flows were broadly based, with 18 funds taking in over $10 billion, and four of the five Municipal Bond Funds recording the biggest inflows had high yield or intermediate term mandates.

Cameron Brandt is Director of Research for EPFR Global, an Informa Financial Intelligence company.

TAGS: Mutual Funds
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