Investor Demand for U.S. Mortgage Funds Remains High

Funds in the U.S. Mortgage Funds (USM) peer group (including both mutual funds and ETFs) took in $1.1 billion of net new money for the fund-flows week ended Wednesday, January 15, 2020. This result marked the 17^th consecutive weekly net inflow for the peer group and was its second-largest weekly increase ever (Lipper began tracking fund flows data in 1992) trailing only the $1.4 billion positive net flow for the fund-flows week ended February 13, 2019. USM funds are coming off their second-largest annual net inflow in 2019 (+$18.7 billion) behind only the $28.5 billion net intake for 2012.

The yield on the 30-year Treasury bond (a traditional length of a residential mortgage in the U.S.) fell 63 basis points (bps) during 2019 (from 3.02% to 2.39%). The declining yields make mortgage funds more attractive due to the inverse relationship between bond yields and prices. Conversely, during 2018 when the yield on the 30-year Treasury note rose 28 bps the USM peer-group suffered net outflows of $5.6 billion. The 30-year Treasury closed January 15 at 2.23%, down 16 bps from year-end.

The majority of the net inflows for this past week (+$924.8 million) and 2019 (+$13.3 billion) belonged to the ETFs in the USM peer group. The largest individual positive net flows last year belonged to iShares MBS ETF (MBB), DoubleLine Total Return Bond Fund, Vanguard Mortgage-Backed Securities Index Fund, and First Trust Low Duration Opportunities ETF (LMBS) which took in $8.3 billion, $5.2 billion, $3.4 billion, and $1.9 billion, respectively. iShares MBS ETF (MBB) dominated the net inflows among the group last week as the ETF recorded a total net intake of $867.4 million.