November 4, 2016

U.S. Fund-Flows Weekly Report: Investors Leave Taxable Bond Funds as a December Fed Interest Rate Hike Looms

by Patrick Keon

Thomson Reuters Lipper’s fund macro-groups (including both mutual funds and exchange-traded funds [ETFs]) took in $10.9 billion of net new money for the fund-flows week ended Wednesday, November 2. Despite three of the four fund macro-groups suffering net outflows for the week, an overall net inflow was posted because of the activity in money market funds, which saw their coffers grow by $22.2 billion. The other groups’ net outflows were led by taxable bond funds (-$7.7 billion), while equity funds and municipal bond funds chipped in $3.4 billion and $324 million, respectively, of net outflows.

The S&P 500 Index finished the week with its most consecutive losing trading sessions (seven) since 2011 and closed at its lowest level in approximately four months (2,097.94). For the week the index retreated 1.94%, with the main driving forces for the losses being the expected Federal Reserve interest rate hike in December and increased worries over the unsettled U.S. presidential election.

Investors fled from taxable bond funds as it became more apparent that the Federal Reserve is very likely to raise interest rates at its December meeting. The $7.7 billion the group saw leave this past week was its highest negative flows of the year, far surpassing the $3.1-billion loss for the fund-flows week ended June 15. ETFs (-$5.4 billion) dominated the net outflows for taxable bond funds, with mutual funds contributing $2.2 billion to the total net outflows for the group. Funds in the High Yield Funds (-$3.5 billion) and Corporate Debt BBB-Rated Funds (-$2.6 billion) classifications were the hardest hit on the ETFs side, while the High Yield Funds peer group (-$665 million) posted the highest net outflows for mutual funds.

Equity mutual funds (-$3.5 billion) accounted for all of the net outflows for equity funds; equity ETFs posted a positive flow of $163 million. For mutual funds the outflows were fairly evenly split between domestic equity funds (-$1.8 billion) and nondomestic equity funds (-$1.7 billion). This was contradictory to the year-to-date trend in which money leaving domestic equity funds (~$110 billion) far outdistanced that of the nondomestic equity funds group (~$18 billion). For individual ETFs the largest net inflows belonged to iShares Core S&P 500 (IVV, +$464 million) and PowerShares QQQ (QQQ, +$426 million).

Municipal bond mutual funds had net outflows of $338 million for the week. Similar to taxable bond funds, the largest net outflows belonged to the riskiest assets; the High Yield Muni Debt Funds group saw $182 million leave.

The $22.2 billion of net inflows for money market funds was their second largest weekly inflows of the year, behind only the $25.1 billion during the fund-flows week ended June 29. The largest net inflows among the money market peer groups this past week belonged to Institutional U.S. Government Money Market Funds at $16.5 billion.

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