June 22, 2019

Taxable Bond Funds Continue to Attract Net New Money

by Pat Keon, CFA.

Taxable bond funds (including both mutual funds and ETFs) had positive flows of more than $7.0 billion in each of the last two fund-flows weeks. These results represent the group’s second and third largest weekly net inflows this year, trailing only the $8.4 billion net positive flow during the fund-flows week ended January 9, 2019. Overall, it has been a strong year for taxable bond funds as they have net positive flows of $134.1 billion for the year to date, and net inflows in 20 of the 24 weeks.

This year’s bond rally grew even stronger over the last couple of weeks as it became apparent that the Federal Reserve was considering cutting interest rates for the first time since December 2008. While the Fed kept rates unchanged at its policy meeting this week, it did forecast its intentions for future cuts as it stated that its goal was to sustain the current economic expansion and that economic uncertainties have increased. These statements led the market to speculate that a 25-basis-point rate decrease was likely at the Fed’s next policy meeting in July. These statements also pushed government bond yields down further, with the shorter-term maturity bonds—which are impacted more by rate changes—experiencing the largest declines. The two-year Treasury note closed Thursday, June 20, at 1.72%—down 14 basis points from its close two days earlier—which was before the Fed announcement.

There is an inverse relationship between bond yields and prices—as yields go down prices go up. As bond yields have decreased at all maturities, we’ve seen that reflected in net inflows into bond funds over the past two weeks as peer groups at different maturity ranges (short-term, intermediate, and long-term) have all taken in net new money. The largest net inflows among the taxable bond fund peer groups over this two-week period belong to Corporate Debt Funds BBB-Rated (+$2.7 billion), Core Plus Bond Funds (+$2.6 billion), Short Investment-Grade Debt Funds (+$1.7 billion), and Short U.S. Treasury Funds (+$1.4 billion). The Corporate Debt Funds BBB-Rated peer group is considered long-term as the effective maturities for these funds are typically greater than 10 years, while Core Plus Bond Funds is intermediate (effective maturity between five and 10 years), and Short Investment-Grade Debt Funds and Short U.S. Treasury Funds are both short-term (effective maturity between one and three years).


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