October 30, 2018

A Shift Toward Short Maturities and Safe-Haven Plays in October

by Tom Roseen.

In the first several weeks of October income-seeking fund investors continued to shorten the maturity of the fixed income funds they were buying. Through the Lipper fund-flows week ended October 24, 2018, investors redeemed a net $6.4 billion from taxable fixed income funds and ETFs.

However, ultra-short- to intermediate-term bond funds have attracted a net $4.6 billion for the month of October thus far. With interest rates on the rise and more rate increases promised by the Federal Reserve, fixed income investors are choking up on the bat and lightening up on their go-to fund classification—Core Bond Funds.

For 2017 Core Bond Funds (aka intermediate investment-grade debt funds) attracted the largest net inflows (+$102.5 billion) of Lipper’s 28 taxable bond fund classifications. The classification has taken in $40 billion net for 2018 year to date, second only to Ultra-Short Obligation Funds (+$46 billion), but it has witnessed net redemptions for Q4 so far, handing back some $3.6 billon.

For the month to date Ultra-Short Obligation Funds, taking in $5.5 billion, has attracted the lion’s share of net new money of all Lipper taxable bond fund classifications, followed by Short U.S. Treasury Funds (+$2.3 billion). With the Fed working at keeping inflation under control, the Inflation-Protected Bond Funds classification (-$0.9 billion net) has become less popular than before the recent interest rate hikes.

Breaking down the short- to short-/intermediate-term bond funds into Treasury/government bond funds versus corporate bond funds, we see investors have gravitated toward safe-haven plays, injecting a net $1.7 billion into govies while being net redeemers of investment-grade corporates (-$2.6 billion).

Month to date longer-dated taxable bond fund classifications have suffered net redemptions, handing back $10.9 billion. Of the long-term and general bond fund classifications, Emerging Markets Hard Currency Debt Funds has witnessed the largest draw of net new money, taking in $970 million, followed closely by adjustable-rate-focused Loan Participation Funds (+$828 million). At the other end of the spectrum fund investors have given High Yield Funds (-$5.5 billion), Corporate BBB-Rated Debt Funds (-$1.9 billion), and Flexible Income Funds (-$1.7 billion) the cold shoulder.

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