Flows into EPFR Global-tracked Bond Fund groups tilted away from those with U.S. mandates during the first week of March, with expectations of another rate hike, the prospect of another stand-off over the U.S. debt ceiling and concerns about the Fed’s balance sheet goals all taking their toll. U.S. Bond Funds recorded their smallest weekly inflow YTD while Global and Emerging Markets Bond Funds extended their current inflow streaks, Europe Bond Funds snapped a seven-week run of redemptions and Asia Pacific Bond Funds posted outflows for the seventh week in a row.
At the asset class level the recent slump in energy prices and the prospect of higher U.S. interest rates prompted investors to cash in gains from their High Yield Bond Funds, with redemptions hitting a 12-week high, while Bank Loan Bond Funds—also known as Floating Rate Funds—extending a run of inflows stretching back to early November.
According to David Ader, Informa Financial Intelligence’s chief macro strategist, “the discussion about two, three or more hikes in this so-far sedated cycle is now besides the point. The new thing is how the Fed handles any reduction in its balance sheet. Any reduction is the flipside of quantitative easing, which took securities out of the market. In this cycle, there is a real threat of monetary policy not only impacting the front end, but the balance of the curve via asset sales.”
“The Trump administration [says] that ultra-long bonds should be taken seriously and I’d argue that there’s really no other choice. With Trump’s fiscal spending plans…we have that much more issuance to deal with when the budget deficit was bound to explode anyway: whether the administration gets $1 trillion in new spending or zero, the deficit has to be financed. And that financing won’t be a short-lived phenomenon. That means more bonds, likely very long bonds, and thus at least relative pressure on the long end of the yield curve,” said Ader.
During the past week U.S. High Yield Bond Funds saw the biggest outflows in cash terms among U.S. Bond Fund groups and Long Term Corporate Bond Funds inflows as a percentage of AUM. U.S. Bank Loan Bond Funds recorded the biggest inflows in dollar terms and Long Term Government Funds in percentage of AUM.
Europe Bond Funds recorded their first inflow since mid-January ahead of a policy meeting by the European Central Bank that is expected to leave current policies unchanged. This group also benefited from a more sanguine view of France’s general election next month, with flows into France Bond Funds hitting their highest total since the fourth week of July.
Both Hard and Local Currency Emerging Markets Bond Funds enjoyed solid inflows during a week when Citibank announced the inclusion of Chinese sovereign bonds in three of its indexes. But dedicated China Bond Funds posted outflows for the 23rd time in the past six months.
Cameron Brandt is Director of Research for EPFR Global, an Informa Financial Intelligence company.