April 6, 2018

Taxable Bond Funds Continue to Attract Net New Money

by Patrick Keon.

Taxable bond funds (including both mutual funds and ETFs) had positive net flows of $47.7 billion for first quarter 2018, which followed 2017’s annual net inflows of $297.5 billion—the group’s third highest annual net inflows ever. Taxable bond funds continued to look attractive to investors, despite what appears to be an adverse set of current circumstances: (1) the Federal Reserve raising interest rates again in mid-March, (2) the Fed forecasting two more rate increases this year and three more in 2019, (3) stronger inflation data, and (4) the threat of a trade war with China that could potentially cause the Fed to steepen its current interest rate forecast. Despite the headwinds for this asset class, it still must look more appealing to investors than the volatility the stock market is currently offering.

Corporate investment-grade debt funds (+$42.8 billion) were responsible for the majority of the overall net inflows for the taxable bond macro-group during Q1. The largest net outflows belonged to corporate high-yield funds, which saw their coffers shrink almost $20 billion. This activity could have been a function of the widening credit spreads occurring in Q1. The BofA Merrill Lynch US High Yield Option-Adjusted Spread grew 21 basis points for Q1 to 3.79%. The theory is that as credit spreads widen riskier assets become less attractive, which was proven by the net-negative flows for junk debt (high–yield debt) funds and the net-positive flows for the high-quality debt funds (investment-grade). The largest individual net inflows among the funds in the corporate investment-grade debt group belonged to two passively managed products: Vanguard Total Bond Market II Index Fund (+$6.0 billion) and Vanguard Total Bond Market Index Fund (+$3.8 billion). The largest individual net outflows within the high-yield peer group belonged to SPDR Bloomberg Barclays High Yield Bond ETF (JNK, -$3.5 billion) and iShares iBoxx $ High Yield Corporate Bond ETF (HYG, -$3.2 billion).


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