So far this year, the collective performance of EPFR Global-tracked Bond Funds is running at around a quarter of the number turned in by Equity Funds. But investors continue to pump fresh money into fixed income fund groups, with the year-to-date total for all Bond and Balanced Funds now north of $250 billion. During the latest week U.S., Emerging Markets and Global Bond Funds extended inflow streaks ranging from 10 to 20 weeks and Europe Bond Funds extended their best run in nearly a year.
According to Informa Financial Intelligence Chief Macro Strategist David Ader, U.S. investors may be betting that hard numbers rather than soft ones such as sentiment indicators tell the real story about the U.S economy. Given that the soft numbers are a lot more bullish, it could be a case of June-and-done for Fed policymakers this year. If the forecasts based on hard date models are the right ones, “surely the Fed will lose some of its hawkish bent and line more with the market’s own, less aggressive, anticipation,” wrote Ader in a recent note.
Another sign that fixed income investors expect slower growth, less inflation and fewer U.S. rate hikes that earlier forecasts suggested is the recent flows, or lack of them, to U.S. Inflation Protected Bond Funds. Having carried a 17-week inflow streak into April, this fund group has now posted outflows five of the past seven weeks with latest redemptions the biggest since late in the third quarter of 2013.
Emerging Markets Bond Funds shrugged off June’s anticipated rate hike and the recent ratings downgrades for South Africa and China, adding another $1 billion to the year-to-date total. At the country level, flows into Turkey Bond Funds hit levels last seen in 2013’s second quarter. EM Corporate Bond Funds posted net inflows for the eighth consecutive week with Latin America Corporate Funds seeing the biggest inflow in cash terms and EMEA Funds in flows as a percentage of AUM terms.
Among Europe Country Bond Funds those dedicated to Italy continued to stand out for the wrong reasons as investors pulled another $133 million from this group. Investors remain worried that European and Eurozone rules limiting the country’s ability to bail out its banking system and stimulate its economy could set the stage for a populist backlash.
Flows into U.S. Bond Fund groups favored Short- and Intermediate-Term Blend and Long-Term Corporate Bond Funds. Flows into U.S. Convertible Bond Funds, which have performed strongly since the beginning of last year, were subdued for the second week running, but positive for the ninth time in the past 12 weeks.
Cameron Brandt is Director of Research for EPFR Global, an Informa Financial Intelligence company.