July 13, 2018

Fund Investors Continue to Embrace Bond Funds Despite Interest Rate Hikes

by Tom Roseen.

Fund investors continued to pad the coffers of taxable bond mutual funds and ETFs, injecting a net $3.3 billion into the macro-group during Thomson Reuters Lipper’s fund-flows week ended July 11, 2018. That was in spite of the Federal Reserve Board intending to hike interest rates two more times this year and with inflationary figures on the rise. June PPI and CPI rose 3.4% and 2.9%, respectively, from a year ago.

For the fund-flows week mutual fund investors were net redeemers of taxable bond funds (ex-ETFs) (-$1.2 billion). Corporate investment-grade debt funds (-$619 million) and high-yield bond funds (-$240 million) suffered the largest net redemptions of the group, while investors injected net new money into government-Treasury funds (+$280 million) and government-mortgage funds (+$58 million).

On the ETF side of the business, however, taxable bond funds attracted some $4.5 billion for the week, with corporate high-yield funds (+$2.1 billion) and corporate investment-grade debt funds (+$1.4 billion) taking in the lion’s share of the net new money.

Despite continued concerns about inflation and rising interest rates and with high expectations for the upcoming Q2 earnings season, taxable bond funds (+$89.8 billion, including ETFs) have outdrawn equity funds (+$49.2 billion) year to date through the flows week ended July 11, 2018.

As might be expected given the likelihood of higher interest rates going forward, Lipper’s adjustable-rate Loan Participation Funds (+$12.7 billion) and Inflation-Protected Bond Funds (+$8.7 billion) classifications have continued to garner attention, accounting for about a quarter of the taxable bond fund net inflows year to date. However, the largest attractor of net new money continues to be Core Bond Funds, taking in $35.0 billion year to date, while Ultra-Short Obligation Funds (+$22.4 billion) and Short U.S. Treasury Funds (+$12.5 billion) have pulled in the next largest sums.

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