March 17, 2017

U.S. Weekly FundFlows Insight Report: Fund Investors Give Bond Funds a Cold Shoulder for the Week

by Tom Roseen

Despite some angst ahead of the Federal Reserve Board’s March policy meeting, the major broad-based indices managed to post plus-side returns for the fund-flows week ended March 15, 2017. Investors took a cautious stance during the week after learning of a better-than-expected February nonfarm-payrolls report, which virtually insured the FOMC would hike interest rates during its meeting. Investors took a wait-and-see approach ahead of the Fed statement, anxious to see if the Fed would tip its hand about the timing and pace of future rate hikes.

For the first week in eight fund investors were net redeemers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), withdrawing $15.0 billion. While investors were net redeemers of money market funds (-$10.7 billion), taxable bond funds (-$5.1 billion), and municipal bond funds (-$0.1 billion), they were net purchasers of equity funds (+$0.9 billion).

At the beginning of the fund-flows week investors applauded the news from the European Central Bank that it had held its interest rates steady as was widely expected. In its statement the bank reiterated that it expects rates to remain at present or lower levels for an extended period, which could be a boon for European markets. Nonetheless, a decline in oil prices below $49 per barrel weighed on energy shares. On Friday oil closed at $48.49 a barrel—its lowest level since November 2016—after active rig-count data showed an increase for the eighth consecutive week. However, with the U.S. economy adding 235,000 jobs for February, beating expectations of 221,000, markets generally moved higher on the day. While the strong jobs report supported a probable Fed rate increase by the end of the flows week, the U.S. dollar and the ten-year Treasury yield stumbled after a disappointing increase in wage growth. On Monday, March 13, the markets managed to hold onto small gains as investors took a wait-and-see approach ahead of the Fed’s meeting, British lawmakers’ vote on Brexit, and the Dutch elections. On Tuesday oil prices got another black eye, weighing on energy shares, as an OPEC report showed Saudi Arabia production had increased. The broad markets sagged after investors learned the February Producer Price Index rose a larger-than-expected 0.3%, further supporting a rate hike on Wednesday. Markets rallied on Wednesday after the Fed hiked its benchmark interest rate 25 basis points, following up with what appeared to be seen by some as a dovish statement on inflation, with pundits believing for now that future rate hikes will be measured and gradual. A 1.5% jump in oil prices on the day and a report that showed February retail sales rose 0.1% also helped the broad-based indices on the last day of the fund-flows week.

For the seventh week in a row equity ETFs witnessed net inflows, attracting just a little under $7.1 billion for the flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (+$6.9 billion), injecting money into the group for the fifth consecutive week. For the twelfth week running nondomestic equity ETFs also witnessed net inflows, this past week attracting $0.2 billion. SPDR S&P 500 ETF (+$3.0 billion), iShares Core S&P 500 ETF (+$1.1 billion), and iShares Core S&P Mid-Cap ETF (+$0.5 billion) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum PowerShares QQQ Trust 1 (-$780 million) experienced the largest individual net redemptions, and iShares MSCI Japan ETF (-$438 million) suffered the second largest net redemptions for the week.

For the fifth consecutive week conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $6.2 billion. Domestic equity funds, handing back a little less than $3.9 billion, witnessed their eleventh week of net outflows despite posting a 1.10% return on average for the flows week. Meanwhile, their nondomestic equity fund counterparts, posting a 1.97% return on average for the week, witnessed net outflows (-$2.3 billion) for the first week in six. On the domestic equity side fund investors continued to lighten up on large-cap funds (-$2.0 billion net), while on the nondomestic side they shunned global equity funds (-$1.7 billion).

For the first week in 11 taxable bond funds (ex-ETFs) witnessed net outflows, handing back $3.9 billion. International & global debt funds witnessed the largest net inflows of the group, taking in $678 million, while corporate investment-grade debt funds (+$293 million) and flexible portfolio funds witnessed the next largest net inflows (+$160 million). Corporate high-yield debt funds (-$3.5 billion) and balanced funds (-$928 million) witnessed the largest net redemptions of the group for the week. With the CPI showing some inflationary pressures during the week and the FOMC raising its key lending rate, it wasn’t too surprising to see Thomson Reuters Lipper’s Inflation-Protected Bond Funds classification taking in money for the nineteenth consecutive week (+$40 million) and bank loan funds witnessing their eighteenth week of net inflows, attracting some $840 million for the week. However, for the third week in a row municipal bond funds (ex-ETFs) witnessed net outflows, handing back some $149 million for the week as investors contemplated the impact a rise in interest rates might have on municipal bond demand.

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