Despite concerns of inflation rearing its ugly head and some pundits saying the greatest bond bull market in history is coming to an end, low interest rates have investors in search of yield.
Year to date, through the Refintiv Lipper fund flows week ended December 9, 2020, investors have injected a net $255.1 billion into taxable fixed income mutual funds and ETFs while being net redeemers of equity funds and ETFs, redeeming a net $344.6 billion year to date.
Investors appear to prefer the quasi-safety of fixed income instruments over their volatile, yet recently lucrative, equity securities counterparts. The average equity and fixed income mutual fund is up 12.49% and 5.18% year to date, respectively—yes, that is even after the large declines we witnessed in February and March due to the coronavirus—the average equity and fixed income fund was down 22.33% and 4.56%, respectively, in Q1 2020.
Except for the strong year-to-date performance witnessed by Emerging Markets Local Currency Debt Funds (+8.84%), Emerging Market Hard Currency Funds (+6.06%), and Global High Yield Funds (+5.45%), which collectively have handed back some $2.3 billion in net flows so far, domestic High Yield Funds have outperformed all other classifications in the taxable fixed income universe year to date, returning 5.18%.
Investors appear to be willing to put risk back in the fixed income sleeve of their portfolios in a tradeoff of achieving higher yields and returns. High Yield Funds have experienced their largest one-year net inflows going back to 1992, when Lipper began tracking weekly estimated net flows, taking in in $44.3 billion so far for 2020. The next largest net inflows for the classification occurred in 2009, when it drew a net $32.0 billion.
While the group witnessed its second largest monthly net outflows on record in March 2020, handing back $12.4 billion, in April and May of 2020 investors injected the two largest monthly sums on record, injecting $14.9 billion and $18.9 billion, respectively. The three-top attractors of investors’ assets in this classification were iShares iBoxx $ High Yield Corporate Bond ETF (HYG), taking in $7.6 billion year to date, BlackRock High Yield Bond Portfolio, K Share Class (BRHYX), attracting $6.4 billion, and PGIM High Yield Fund, R6 Share Class (PHYQX) drawing in $4.8 billion.
With the Federal Reserve Board signaling its intent to keep interest rates low as the U.S. economy continues its recovery, the main question lingering in the back of many investors’ minds is will the $3 trillion rescue package delivered earlier this year, which many hope will be followed up by an additional relief package in the near term, stoke inflation and lead to a rise in interest rates and impact fixed income investors? Until it becomes more obvious, it is likely investors will continue their search for yield to help fund their retirement and current income needs.
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