Investors Ring in the New Year by Padding the Coffers of Inflation-Protected Bond Funds and Loan Participation Funds

The Federal Open Market Committee released its December 2016 policy meeting minutes during the week. In the minutes Fed officials raised the likelihood they may have to raise interest rates faster than previously planned. Following the Fed’s two-day policy meeting in December, it raised its prime lending rate 25 basis points as expected and forecasted three more hikes in 2017, compared to the two that had been anticipated at its September meeting. In the minutes Fed officials raised concern that the labor market appears to be tightening more than expected, and some officials indicated that the risk to their economic growth forecasts had increased because of the expansionary fiscal policies that could materialize in coming years.

Despite the possibility of the Fed’s raising rates at a less gradual rate in coming months, many fixed income investors focused on the uncertainty in the report and took a wait-and-see approach, particularly waiting on the December nonfarm payrolls report due out at the end of the week. During the fund-flows week ended Wednesday, January 4, 2017, investors injected a net $1.2 billion into taxable bond funds, after being net redeemers in eight of the prior nine weeks. While fund investors injected a net $2.2 billion into corporate investment-grade debt funds during the week, they were net redeemers of flexible portfolio funds (-$1.0 billion) and government mortgage funds (-$0.9 billion). Nonetheless, investors’ interest in Thomson Reuters Lipper’s Inflation-Protected Bond Funds (+$132 million) and the adjustable-rate Loan Participation Funds (+$865 million) classifications continued.