Investor Demand for Core Bond Funds Spikes

After a slow start to 2019, the Core Bond Funds peer group has experienced near record-setting net inflows thanks to the Federal Reserve’s policy change regarding its stance on interest rates. The Core Bond Funds group started the year with three straight weekly net outflows—for a total net negative flow of $1.1 billion—coming on the heels of the group’s worst-ever quarter for flows. In Q4 2018, Core Bond Funds saw almost $36.6 billion leave their coffers, which eclipsed the previous quarterly high net outflow (-$29.6 billion in Q3 2013) by a significant amount. The tide turned for the peer group in mid-January, when the Fed walked back the hawkish stance it had taken on rates (as well as its balance sheet reduction program) at its December meeting. 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 (such as 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.

Since the Fed announcement, the Core Bond Funds peer group has experienced 15 straight weekly net inflows. The group’s net inflows for Q1 (+$32.6 billion) were the second best in their history, trailing only the $39.8 billion taken in during Q4 2014. The good news has continued in Q2 for the group as net inflows are at $16.9 billion for the quarter to date. The net inflows for this year have been dominated by the mutual funds (as opposed to ETFs) in the group. Core bond mutual funds took in $32.9 billion and $16.2 billion in net new money for Q1 and Q2, respectively. At the fund level, the year-to-date net inflows have been dominated by passively managed index funds, which have accounted for the four-top flow leaders: Vanguard Total Bond Market II Index Fund (+$19.1 billion), Vanguard Total Bond Market Index Fund (+$7.9 billion), Fidelity US Bond Index Fund (+$4.8 billion), and TIAA-CREF Bond Index Fund (+$3.3 billion).