March 4, 2019

Taxable Bond Funds Rebound in Q1

by Pat Keon, CFA.

After suffering its worst quarter for net outflows ever in Q4 (-$135.4 billion), the taxable bond funds group has bounced back at the start of 2019 with net inflows of $48.8 billion for the year to-date. The asset group has experienced eight consecutive weekly net positive flows since the start of the year. This turnaround was driven by the Federal Reserve softening its stance on both interest rate increases and the reduction of its balance sheet. In early January, Federal Reserve Chairman Jerome Powell stated the Fed would be patient on its interest rate policy and would need to see a reason to raise rates (an increase in inflation) before doing so. This contradicted the Fed’s forecast in December, which called for two rate hikes in 2019. The Fed also announced it would stop selling the bonds it has on its balance sheet relatively soon. In the aforementioned December meeting, Powell stated the balance sheet reduction program was on auto-pilot and the Fed was not reviewing it for any changes. These bonds were acquired by the Fed as part of the quantitative easing program following the global financial crisis in 2008.

All of the taxable bonds macro-groups have taken in net new money this year, with the largest increases belonging to Corporate Investment-Grade Funds (+$17.6 billion) and Corporate High Yield Funds (+$10.3 billion). For the Corporate Investment-Grade Funds group, the largest net inflows belong to the Core Bond Funds (+$10.2 billion) and Ultra-Short Obligation Funds (+$4.9 billion) peer groups. At the fund level in the High Yield Funds space, the most significant net increases belonged to BlackRock High Yield Bond Portfolio (+$2.1 billion) and iShares iBoxx $ High Yield Corporate Bond ETF (HYG, +$1.5 billion). For the Core Bond Funds and Ultra-Short Obligation Funds peer groups, the largest net inflows belonged to Vanguard Total Bond Market II Index Fund (+$6.9 billion) and Morgan Stanley Institutional Ultra-Short Income Portfolio (+$1.7 billion), respectively.






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