March 17, 2017

Investors Turn Their Backs on Bond Funds During the Week

by Tom Roseen

In preparation for the March Federal Reserve Board’s two-day policy meeting this past week, investors took their collective foot off the pedal for a very popular asset class, preferring to take a wait-and-see approach ahead of the Fed statement. They remained anxious to see if the Fed would tip its hand about the timing and pace of future rate hikes.

Despite markets’ finishing the fund-flows week ended Wednesday, March 15, 2017, in positive territory, fund investors (including those of conventional funds and exchange-traded funds [ETFs]) were net redeemers of taxable bond funds (-$5.0 billion), an asset class that has witnessed net inflows for ten of the last eleven weeks. While equity funds managed to attract net new money (+$0.9 billion for the flows week) for an eighth consecutive week, high-yield bond funds (often highly correlated with equity fund performance and flows) became the pariah of the fixed income universe. They handed back some $5.7 billion net for the fund-flows week and suffered their second largest weekly net redemptions since Lipper began tracking weekly flows in 1992—surpassed only by the $7.1 billion of net outflows seen for the week ended August 6, 2014.

Weekly ENFs High Yield Funds 20170315

While investors appeared to need higher yields to compensate them for taking on greater risk after the Fed hiked its benchmark interest rate 25 basis points, they continued to pad the coffers of Inflation-Protected Bonds Funds (+$246 million) and Loan Participation Funds (+$863 million) for the fourteenth and eighteenth consecutive week, respectively. And even though fund investors backed away from riskier assets on the domestic bond fund side, they appeared to warm up to nondomestic bond funds, injecting $478 million net into international & global debt funds and $182 million net into emerging markets debt funds during the week (both groups experiencing their sixth consecutive week of net inflows).

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