EPFR-tracked Bond Funds eked out a minimal inflow during the first week of July as fixed income investors waited for clues to the pace of U.S. monetary tightening, mulled some of the latest inflation data and conducted their own back-of-the-envelope “stress tests” of corporate borrowers and their ability to meet their obligations if global economic growth stalls. High Yield Bond Funds posted their ninth consecutive outflow, Bank Loan Funds saw an 18-week inflow streak come to an end and Emerging Markets Bond Funds extended their longest run of redemptions since 2016.
David Ader, Informa Financial Intelligence’s chief macro strategist, believes that investors are right to be concerned. “U.S. corporations have the highest level of debt ever,” he pointed out in a recent note to clients. “As a percent of GDP, at 45.4 percent, it’s also pretty much at the highest we’ve ever seen. With spreads starting to widen I think it’s reasonable to see investor appetite shy, especially if we see the economy start to slow. What, with illiquid corporate bonds in liquid ETFs, I think we are vulnerable to an ‘exaggerated’ selloff in that event.”
In the meantime, higher energy prices and a tight labor market have boosted headline inflation in the U.S. to a 6-year high. Inflation Protected Bond Funds absorbed over $500 million during a week that also saw inflation in the eurozone exceed the European Central Bank’s 2 percent target.
The difference between the eurozone’s headline number and the subdued core inflation number suggests the ECB may have reason to move slowly when it comes to normalizing monetary policy. That, and the desire of European investors to rotate out of Europe Equity Funds until the region’s political landscape settles, helped Europe Bond Funds attract fresh money for the second straight week with commitments hitting a 12-week high.
Emerging Markets Bond Funds remain under pressure from perceptions of shrinking dollar liquidity and the revised outlook for global economic growth. Among the subgroups, Asia ex-Japan Corporate Funds suffered the biggest outflows in percentage of AUM terms and GEM Mixed Funds in cash terms.
Investors looking to the U.S. favored funds with government debt mandates. Both Intermediate and Long Term U.S. Government Bond Funds recorded solid inflows, as did Mortgage Backed Bond Funds. But Municipal Bond Funds chalked up their first weekly inflow since early May.