Both mutual fund investors and authorized participants (APs, those investors who actually create and redeem ETF shares) continue to inject net new money into fixed income funds for 2019. For the Lipper fund-flows week ended February 20, 2019, investors injected a net $3.0 billion and $1.5 billion into taxable fixed income funds (including those of conventional funds and ETFs) and municipal bond funds, respectively, while being net redeemers of both equity funds (-$1.8 billion) and money market funds (-$11.7 billion).
Year-to-date, equity funds have attracted a net $3.5 billion and taxable bond funds have taken in some $44.5 billion as fixed income investors breathed a sigh of relief after hearing more dovish comments from Federal Reserve Board officials. U.S. markets continued to move higher on Wednesday, January 20, after the Fed released the meeting minutes from its January policy-setting meeting in which Federal Open Market Committee members were mixed on the need for future rate hikes, but almost in total agreement to stop reducing its balance sheet later this year.
Several market pundits changed their stance from believing the Fed was still planning two to three rate hikes in 2019 to anticipating none, which has led to some plus-side returns in bonds and a change in investors’ approach to investing in bonds. During the first three quarters of 2018, investors were padding the coffers of Loan Participation Funds (floating-rate bond funds, aka bank loan funds) in anticipation of rising interest rates. However, in the last quarter of the year, investors became net redeemers.
That trend has dominated the flow trends for the year so far. In 2018, despite witnessing inflows in 39 of the 52 weeks, Loan Participation Funds handed back some $4.3 billion for the year. So far in 2019, Loan Participation Funds have witnessed net redemptions of $5.9 billion through the third week in February, witnessing 14 consecutive weeks of net redemptions.
The main attractors of fixed-income focused assets for 2019 thus far were Core Bond Funds (+$9.6 billion), U.S. Mortgage Funds (+$5.4 billion), General U.S. Treasury Funds (+$5.1 billion), and Corporate Debt BBB-Rated Funds (+$4.2 billion).
Fixed income investors appear to be willing to take on a little more risk in search of yield. Interestingly, while equity funds have attracted just $3.5 billion year-to-date, a dichotomy between investor types might be somewhat telling. Year-to-date, conventional equity fund investors injected a net $19.4 billion, while authorized participants have been net redeemers, removing $15.9 billion.
