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FUND FLOWS: Investors Pull Money from High-Yield, Emerging Markets Bond Funds

Muted investor enthusiasm for fixed income as money moves to short-term treasurys and corporate debt.

Bond Fund flows, which averaged over $11 billion a week in 2017, remained subdued during the fourth week of April, according to data from EPFR. Rising U.S. debt supply and the pace of the U.S. Federal Reserve’s tightening, the possibility the European Central Bank’s quantitative easing program is heading towards the finish line, and concerns about the credit quality of riskier asset classes restrained investors. 

High Yield Bond Funds posted outflows for the 13th time in the past 15 weeks, with the latest redemptions the biggest since early March, while Emerging Markets Bond Funds recorded their largest outflow since the second week of February.

According to Ken Jaques, a senior analyst with EPFR’s sister company Informa Global Markets, “The 10-year Treasury note is banging its head against a significant resistance level of 3.05 percent. If the 3.05 percent level on the 10-year is broken easily, rates could climb more quickly to the 3.25 percent level that some strategists have set as a year-end target. The 3 percent threshold is not only a psychological level, but a technical one as well. When investors become concerned about inflationary pressures, they generally trade in longer-dated Treasurys for securities with a shorter duration on fears that inflation will eat away at capital over longer periods.”

Flows into EPFR-tracked U.S. Government Bond Funds this year have tilted to those with short-term (zero to four-year) mandates, although the rotation so far has come at the expense of funds with intermediate-term mandates.


The rotation from long to short term is much more pronounced when it comes to funds dedicated to investment grade corporate debt. Year-to-date over $7 billion has flowed out of Long Term U.S. Corporate Funds while more than $4 billion has found its way to Short Term U.S. Corporate Funds.

Europe Bond Funds saw their longest run of inflows since mid 3Q17 come to an end ahead of the European Central Bank’s April policy meeting, which left interest rates and the pace of asset purchases unchanged. The latest allocations data for this fund group shows managers continue to cut their exposure to the Netherlands while allocations to Spain are at their highest level since 4Q15 and for Greece in over four years.

Retail investors turned net redeemers from Emerging Markets Bond Funds going into the final week of April, and Frontier Markets Bond Funds posted their first outflow since mid-December as fears of a more rapid pace for U.S. interest rate hikes cooled appetites for this asset class. At the country level Czech Bond Funds swam against the tide sweeping money out to Emerging Europe Funds. They recorded their biggest inflow since 2Q16 during a week when Emerging Europe Bond Funds suffered their heaviest redemptions since early 1Q15.

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

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