U.S. Emerging Markets and Global Bond Funds continued to pull in fresh money during the second week of February in spite of fears that U.S. Federal Reserve policymakers, who next meet formally in mid-March, will hike rates again sooner than the market expects. Still, redemptions from Europe Bond Funds picked up steam as investors focused on the political and fiscal challenges facing the Eurozone and wider European Union in the coming months.
At the asset class level investors continue to display a greater appetite for multi-asset exposure (inflows for Balanced and Total Return Funds), some conviction that U.S. interest rates will move higher (outflows from Municipal Bond Funds) and fears that inflation could gain momentum in the world’s largest economy (flows into U.S. Inflation Protected Bond Funds for the 25th time in the past 26 weeks).
David Ader, Informa Financial Intelligence’s Chief Macro Strategist, remains doubtful about inflationary pressures accelerating the pace of U.S. interest rate hikes during 2017. In Ader’s opinion, “unless [the market starts pricing in odds of over] 70-75 percent, a March hike is off the table—the Fed doesn’t like surprises and everyone’s getting enough of those out of Washington anyway. With six more meetings after March, the Fed has ample opportunity to hike three times should they err on a more aggressive stance, let alone two. All things being equal, I’ll err on the side of June hike where the odds are near 72 percent.” On the question of inflation, he points to the strong dollar’s effect on import prices and the still glacial pace of real wage growth.
The latest flows into U.S. Bond Funds were broadly distributed, with Short Term Bond Funds seeing the biggest flows in cast terms and Long Term Government Funds in flows as a percentage of AUM terms. The latest outflows from U.S. Municipal Bond Funds were driven by retail investors, whose redemptions hit a six-week high and offset a seventh consecutive week of institutional commitments.
Institutional investors were, however, the biggest contributors to the outflows recorded by Europe Bond Funds, trumping a fifth straight week of retail support. Although France and Greece dominated the headlines, at the country level Italy Bond Funds were the hardest hit with over $160 million flowing out as fears that the current, technocratic government’s term could be cut short by a leadership challenge from former prime minister Matteo Renzi that opens the door to the early election sought by Italy’s populist Five Star movement.
Yields on Italian sovereign debt have been rising steadily since late summer, and technical analysis by Ed Blake at EPFR Global sister company Informa Global Markets (IGM) indicates they have further to go. “The [recent consolidation] of the Italian 10-Year Sovereign Bond yield beneath its 19-month high remains corrective and should hold above a 5-month rising trend-line before breaking out towards the 29 June 2015 lower high,” Blake wrote in a recent note.
Cameron Brandt is Research Director of EPFR Global, an Informa Business Intelligence company.