The second quarter ended with fixed income investors waving the white flag at the U.S. Federal Reserve and its long-telegraphed plan for normalizing interest rates. Emerging Markets Bond Funds posted their biggest outflow since late 2016, High Yield Bond Funds experienced net redemptions for the eighth straight week and both of the major EPFR-tracked multi-asset fund groups saw over $1 billion redeemed. Bank Loan Funds, meanwhile, posted the 18th consecutive weekly inflow and were one of the few fund groups to enjoy significant retail support.
With investors in a risk averse mood, fund groups dedicated to U.S. sovereign and municipal debt fared relatively well during the week ending June 27 and Mortgage Backed Bond Funds, which many investors still believe investing in an asset class with an implicit federal guarantee, posted their biggest weekly inflow since late 2014. Flows into Europe Bond Funds hit an 11-week high as they snapped their longest run of outflows since the first quarter of 2017 and Global Bond Funds ended their worst losing run since the first quarter of 2016.
A comparison of the first quarter and quarter-to-date flows highlights the shift in sentiment towards emerging markets debt and multi-asset strategies as investors pencil in four U.S. rate hikes this year and weigh the odds that the European Central Bank will taper and then end its current quantitative easing program by the beginning of 2019.
The latest redemptions from Emerging Markets Bond Funds saw over $1 billion pulled out of both Hard and Local Currency EM Bond Funds. At the country level China Bond Funds posted consecutive outflows for the first time since the beginning of the year and Romania Bond Funds extended an outflow streak stretching back to the first week of September while Russia Bond Funds posted their 10th consecutive inflow.
Global Bond Fund allocations for emerging markets, which peaked at over 20 percent of the average portfolio in first quarter of 2013, have now fallen to levels last seen in late 2010. Weightings for developed Europe, meanwhile, are at a two-year high.
Short Term Mixed Funds recorded the biggest inflows in cash terms among U.S. Bond Fund groups and Intermediate Term Government Bond Funds led the way in flows as a percent of AUM terms. All three of the investment grade corporate groups by duration recorded inflows while U.S. High Yield Bond Funds saw over $1.5 billion redeemed. Overseas appetite for exposure to U.S. debt remains subdued. Foreign currency-denominated flows to U.S. Bond Funds were negative for the 23rd time in the 26 weeks year-to-date.