April 12, 2019

Despite Strong Equity Returns YTD, Investors Still Embrace Fixed Income Funds in Uncertain Times

by Tom Roseen.

A softer, gentler Federal Reserve has been a boon for fixed income investors. Year-to-date through the Lipper fund-flows week ended April 10, 2019, equity funds (including ETFs) handed back some $2.8 billion despite the average equity fund posting a 14.94% return. Meanwhile, taxable fixed income funds took in a net $97.5 billion, with the average taxable fixed income fund returning 3.91%.

For the Lipper fund-flows week, market enthusiasm remained guarded, with the headline news focused on the possibility of a disappointing Q1 earnings season, slowing global economy, and new threats by the U.S. to apply tariffs on $11 billion of European goods. However, fixed income investors cheered the March Federal Reserve Board minutes, which reassured investors the Fed was in no hurry to hike interest rates, and its views on inflation remained tame.

Longer-dated fixed income funds were given a shot in the arm after the spread between the three-month Treasury bill and the ten-year note inverted for the first time since 2007 late in March. The two-/ten-year Treasury spread ended the Lipper fund flows week at 17 basis points (bps). The one- (+2.40%), two- (+2.41%), three- (+2.43%), and six-month (+2.46%) Treasury yields were all inverted in comparison to the seven-year yield (+2.37%) on April 10. The ten-year Treasury yield declined 21 bps since December 31, 2018, to close at 2.48% at the end of the fund-flows week.

The Lipper Core Bond Fund classification attracted the largest net inflows year-to-date of the taxable bond fund classifications through the most recent fund-flows week, taking in some $35.2 billion. Vanguard Total Bond Market II Index Fund (including all share classes) took in the largest amount of net new money for the group, attracting $14.1 billion, followed by the Vanguard Total Bond Market Index Fund (+$6.1 billion) and Fidelity US Bond Index Fund (+$4.3 Billion).

Lipper’s High Yield Bond Fund classification took in the next largest sum for the taxable fixed income fund universe, drawing in $14.6 billion. iShares iBoxx $ High Yield Corporate Bond ETF (HYG), SPDR Bloomberg Barclays High Yield Bond ETF (JNK), and BlackRock High Yield Bond Portfolio (including all share classes) each attracting a little less than $2.1 billion, took in the largest amounts of net new money of this classification.

The next largest attractor of net new money on the taxable fixed income side was the International Income Funds classification, taking in $9.9 billion year-to-date. The top attractor of assets in this group was the Vanguard Total International Bond Index Fund (including all share classes and the ETF offering), which took in $9.4 billion and was followed afar by PIMCO Intl Bond Fund (US Dollar-Hedged) (including all share classes), attracting $744 million.

Investors will be keeping a keen eye on the upcoming earnings reporting season, trade negotiations between the U.S. and China, and central bank actions over the next several weeks and months. Flows into and out of both ETFs and conventional funds could be a barometer of investor angst for the fund industry during this time of uncertainty.

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