Ultra-Short Obligation Funds Continue Their Hot Streak

Lipper’s Ultra-Short Obligation Funds peer group (including both mutual funds and ETFs) took in $2.1 billion in net new money for the fund-flows trading week ended Wednesday, September 11. This was the group’s second-largest weekly net inflow ever (trailing only the $2.5 billion positive net flow for the November 21, 2018 fund-flows week) and its eleventh consecutive weekly net intake. Investor infatuation with this peer group extends way beyond the current quarter as ultra-short obligation funds have experienced only nine weekly net outflows since the start of 2017. This time period spans 141 weeks and equates to a 93.6% success rate in respect to achieving weekly net inflows. As could be expected, this run has led to the group’s two best annual net inflows with $59.7 billion and $25.1 billion, respectively, for 2018 and 2017. The group has grown its coffers by $20.6 billion for the year to date, and will surpass 2017 for the second largest annual net inflow if it continues at this rate.

Ultra-short funds have benefited from the narrowing of the yield curve. Shorter-term maturity investment-grade debt becomes more attractive as spreads narrow because investors can receive a return similar to the longer-dated maturities, but with significantly less risk. Since the end of 2016, the one-year/10-year Treasury spread has gone from 160 basis points (bps) to an inversion of 4 bps as of September 11. Inversion means that the one-year note is yielding more than the 10-year note. We chose the one-year note for comparison because funds within the ultra-short obligation peer group have a maximum allowable effective maturity of one year.

This year’s net inflows for the group have been more heavily weighted toward mutual funds (+$16.5 billion) as opposed to ETFs (+$4.1 billion), but the week’s results were a little more tightly bunched with mutual funds responsible for $1.3 billion of the positive net flows and ETFs contributing $728 million. The largest individual net inflows for the week belong to Morgan Stanley Institutional Fund Trust Ultra-Short Income Portfolio (+$1.0 billion) and iShares Floating Rate Bond ETF (FLOT, +$673 million).