Fund Investors Seek a Hedge Against Inflation Risk and Interest Rate Increases

Despite a 25-basis-point (bp) increase in the ten-year Treasury yield for the month to date, investors continued to prefer fixed income funds over their equity counterparts. For the fund-flows week ended October 26, 2016, mutual fund and exchange-traded fund (ETF) investors continued to pad the coffers of fixed income funds, injecting a net $776 million into the group and bringing the year-to-date net inflows for fixed income funds to $126.0 billion, their largest net inflows for any given year since 2012.

As might be expected given the rise in Treasury yields at the long-end of the curve, investors shunned the government-Treasury & mortgage funds (-$660 million) and government-Treasury funds (-$536 million) macro-groups during the flows week, but they were net purchasers of the corporate investment-grade debt funds (+$1.7 billion) macro-group.

With investors pricing in a 79.3% chance that the Federal Reserve Board will raise interest rates at least 25 bps in December, according to the CME Group’s FedWatch Tool, fund investors have begun to purchase floating-rate and inflation-protected bond funds in earnest. Thomson Reuters Lipper’s Loan Participation Funds (aka bank loan funds) classification attracted some $291 million for the most recent flows week—for their thirteenth consecutive week of net inflows, and Inflation-Protected Bond Funds took in $385 million—for their thirty-fourth week of net inflows in 44 weeks. Year to date the Loan Participation Funds classification is still in net-redemption territory (-$2.3 billion), while Inflation-Protected Bond Funds has attracted some $6.2 billion—for the largest yearly sum since 2011.

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