Anticipation of higher U.S, interest rates and a stronger dollar, and the knock-on effects for a range of fixed income asset classes, kept the pressure on EPFR-tracked Bond Funds during the first full week of May. Overall, they posted consecutive weekly outflows for the first time since 4Q16 as redemptions from Emerging Markets Bond Funds hit a 12-week high and over $1 billion flowed out of Global Bond Funds for the second straight week.
At the asset class level flows into Bank Loan Funds hit an eight-week high, High Yield Bond Funds posted outflows for the 14th time in the 19 weeks year-to-date, Mortgage Backed Bond Funds posted their first outflow in 2018 and Municipal Bond Funds snapped a five-week redemption streak.
The over $90 billion that flowed into EPFR-tracked U.S. High Yield Bond Funds in the wake of the Great Financial Crisis has flowed back out—and more besides—even though the performance of the asset class is holding up. This suggests that mutual fund investors see U.S. junk bonds as a central bank liquidity play and are heavily discounting the fundamental case for these bonds which, on the face of it, remains strong. That case includes (1) a default rate of around 3 percent compared to the 5.6 percent historical average, (2) a surge on corporate profitability, making it easier for them to service their debts and (3) rising oil prices which help the riskiest slice—shale oil producers—of the post GFC issuers.
Overall flows to U.S. Bond Funds continue to shift towards those with short term (0- to 4-year) mandates. Short Term U.S. Government Bond Funds recorded inflows for the 15th time in the past 16 weeks and Short Term Corporate and Mixed Bond Funds also attracted fresh money.
Emerging Market Bond Funds of all durations, currency types and geographic focus struggled in early May. The only regional subgroups to post inflows in excess of $10 million were EMEA and Latin America Corporate Funds. At the country level China Bond Funds added another week to their longest inflow streak since 4Q14 despite a trickle of corporate defaults and fears that this year could see the first default by a local government issuer.
Flows for Europe Bond Funds rebounded, although sentiment towards Italian debt slipped and rose in tandem with expectations of where the latest efforts to form a new government will lead. Greece Bond Funds recorded their biggest inflow in nine months as that country moves closer to exiting its latest bailout program.