Inflation-Protected Bond Funds Attract Net New Money for an Eleventh Consecutive Quarter

With the Federal Reserve’s preferred measure of inflation (the personal consumption expenditures price index) reaching the Fed’s target rate (2.0%) for the first time since 2012, we feel now would be an opportune time to review the fund-flows performance of Thomson Reuters Lipper’s Inflation-Protected Bond Funds peer group (including both mutual funds and ETFs). We find that the peer group is in the midst of a historic run: 11 straight quarters of net-positive flows (Q4 2015-Q2 2018) for total net inflows of $37.6 billion. While this streak is the second longest in the peer group’s history (the longest was 15 straight quarters from Q3 2002-Q2 2006), the total net intake of the current period is more than two and a half times as much as that of the previous one (+$14.4 billion). It seems the Inflation-Protected Bond Funds group will have a chance to eclipse the 15-quarter streak, since the Fed is forecasting that inflation will remain at the 2.0% target for the remainder of 2018 and then be in the neighborhood of 2.1% for 2019 and 2020. The Inflation-Protected Bond Funds category also has the largest return (+0.59%) for Q2 2018 in the taxable bond funds macro group. A further indication that Q2 may have represented a flight to safety in the fixed income universe is the fact that the 17 largest quarterly returns (ranging from +1.64% to +0.61%) all belonged to safe-haven municipal debt fund peer groups.

Taking a more granular look at the fund-flows data reveals that the net inflows of Q2 for the peer group were heavily concentrated. The three largest net-positive flows for the quarter accounted for $3.6 billion of net new money for the group and were split between an ETF and two mutual funds. The largest net inflows belonged to Schwab US TIPS ETF (SCHP, +$2.2 billion), while Vanguard Short-Term Inflation-Protected Security Index Fund and Fidelity Inflation-Protected Bond Index Fund contributed $873 million and $522 million to the total net inflows. iShares TIPS Bond ETF (TIP, -$463 million) had the largest net outflows in the peer group for the quarter.