October 19, 2019

Intermediate Core Bond Funds Continue to Attract Money

by Pat Keon, CFA.

Funds in Lipper’s Core Plus Bonds Funds (CPB) and Core Bond Funds (IID) peer groups (including both mutual funds and ETFs) took in $813 million and $494 million of net new money, respectively, for the fund-flows week ended Wednesday, October 16. It’s been a banner year for each group as out of the last 38 weeks (dating back to late January), CPB and IID have experienced net inflows in 37 and 36 weeks, respectively. These streaks have enabled IID (+$79.5 billion) and CPB (+$24.3 billion) to have the best year-to-date net inflows among the taxable bond fund peer groups. CPB is on pace to have its best annual net inflow ever (potentially topping the +$26.7 billion net positive flow in 2017) while IID is on track for its second best, trailing only $115.9 billion in 2009.

Funds in the CPB and IID classifications have benefitted from two factors this year: (1) declining Treasury yields and (2) the Federal Reserve cutting interest rates. Bond prices have an inverse relationship with yields—as yields go down prices go up. CPB and IID are both intermediate-term peer groups. Lipper defines intermediate as having an average effective maturity between five and 10 years. Since the end of 2018, the yield on both the 10-year Treasury note (2.69% to 1.68%) and the five-year Treasury note (2.51% to 1.55%) had dropped approximately one full percentage point by the end of the third quarter. Investors began flocking to both peer groups in late January this year, shortly after the Fed walked back its forecast of two interest rate increases in 2018. From there the possibility of rate reductions were introduced, which the Fed followed through on in Q3 by enacting a 25-basis-point (bps) decrease after both its July and September meetings. It is widely anticipated that the Fed will lower rates by another 25 bps at its meeting later this month.

For the Core Bond Funds group, the year-to-date net inflows have been heavily concentrated in passively managed index funds. The top four individual positive net flows for the group belong to Vanguard Total Bond Market Index Fund (+$19.9 billion), Vanguard Total Bond Market II Index Fund (+$18.1 billion), Fidelity Series Bond Index Fund (+$9.1 billion), and Fidelity US Bond Index Fund (+$6.5 billion), and account for almost 70% of the group’s year-to-date total. The Core Plus Bond Funds group is also significantly concentrated, with four funds accounting for more than 78% of the total net positive flows in 2019. These funds are PGIM Total Return Bond Fund (+$8.8 billion), Metropolitan West Total Return Bond Fund (+$3.8 billion), Baird Core Plus Bond Fund (+$3.4 billion), and Western Asset Core Plus Bond Fund (+$3.1 billion).



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