Heading into mid-May EPFR Global-tracked Bond Funds continued to defy beginning-of-the-year forecasts of a rotation by investors from fixed income to equities. While the overall flow number was less than half the previous week’s, it was the 18th time in the 19 weeks year-to-date these funds have posted inflows and took their tally so far north of the $210 billion mark versus $130 billion for all Equity Funds.
Flows were broadly distributed among Global, US and Emerging Markets Bond Funds, each of which absorbed over $1 billion, and Europe Bond Funds which took in over $300 million.
Among the fund groups at the asset class level taking in fresh money were Municipal Bond Funds, which continue to shrug off Puerto Rico’s slide into de facto bankruptcy. The uncertain process for restructuring over $70 billion of the U.S. territory’s debt, which involves a powerful Federal oversight board and competing claims from different groups of creditors, kicks off with a heading on May 17.
Fixed income investors looking to the U.S. are also beginning to focus on the Federal Open Markets Committee (FOMC) meeting on June 14, when a growing number expect that body to hike interest rates for the second time this year, and third time since late 2016. Flows into U.S. Bank Loan Funds, which are viewed as a play on rising interest rates, dropped to their second lowest total since their current inflow streak began in mid-November.
Europe is well behind the U.S. when it comes to monetary tightening. But that has not stopped investors thinking about it, with flows to Europe Bond Funds sliding as the week progressed and more economic data emerged from the Eurozone suggesting that the case for the extraordinary levels of monetary support the currency union has been enjoying is less compelling — especially to German policymakers — than it was even six months ago. Europe Inflation Protected Bond Funds, which are sensitive to hints of tighter monetary policy, have experienced net redemptions the past three weeks and seven of the past eight.
Emerging Market Bond Funds extended their current inflow streak, with investors again gravitating to funds with hard currency and broad geographic mandates. Those with greater risk appetite have been steering some money into Emerging Markets Corporate Bond Funds which have posted inflows for seven straight weeks, the longest such run since the first half the second quarter of 2016.