November 11, 2021

U.S. Weekly FundFlows Insight Report: Taxable Bond Funds Attract $10.1 Billion Despite Inflationary Signals

by Jack Fischer.

During Refinitiv Lipper’s fund-flows week ended November 10, 2021, investors were overall net purchasers of fund assets (including both conventional funds and ETFs) for the fourth straight week, adding $31.3 billion.

Money market funds (+$11.0 billion), taxable bond funds (+$10.1 billion), equity funds (+$8.3 billion), and tax-exempt bond funds (+$1.9 billion) all attracted new money during the fund-flows week.

Index Performance

At the close of Refinitiv Lipper’s fund-flows week, U.S. broad-based indices retreated after last week’s exceptional returns. The NASDAQ (-1.19%) was hit the hardest, followed by Russell 2000 (-0.61%), S&P 500 (-0.30%), and DJIA (-0.21%).

Overseas, the broad market indices traded down as well. The DAX 30 (+0.10%) was the only bright spot, while the Nikkei 225 (-1.26%), FTSE 100 (-0.12%), and Shanghai Composite (-0.09%) all depreciated on the week.

Rates/Yields

Last week, shorter-dated Treasury yields decreased while the longer-dated yields increased. This week we saw a flattening of the yield curve during a volatile week in the Treasury market. The 10- and 30- year Treasury yields ended up falling 1.33% and 3.42%, respectively, as both two- (+5.23%) and three-year (+10.30%) yields increased.

Since the end of Q3 2022, the two- (+74.05%), three- (+59.35%), and five-year (+21.91%) Treasury yields have significantly outpaced the 10- (+2.03%) and 30-year yields (-8.27%). As of October 28, the U.S. 30-year fixed-rate mortgage average fell for the first week in three to 3.09% (-1.59% week over week). Both the United States Dollar Index (DXY, +1.05%) and VIX (+19.34%) increased since last Thursday.

Market Recap

On Thursday, November 4, a day after the Federal Reserve announced their intent to begin tapering asset purchases, the Department of Labor (DOL) reported a new pandemic-era low in weekly jobless claims. The 269,000 initial unemployment claims came in below forecasts and continue to highlight an improving labor market. Treasury yields fell all along the curve—the two-year and 10-year yields dropped (-12.76% and -3.48%, respectively). The DJIA (-0.09%) and Russell 2000 (-0.08%) fell slightly on the day, whereas the NASDAQ (+0.81%) and S&P 500 (+0.42%) realized strong daily gains.

Friday, November 5, marked the second straight day of positive employment data. The DOL reported nonfarm payrolls increased by 531,000 in October, blowing past the forecast of 450,000. Unemployment fell to 4.6% as the U.S. observed the largest increase of jobs in three months. The labor participation rate was unchanged (61.6%) as millions of workers are still waiting on the sidelines—the labor force is still down by almost three million compared to February 2020. The positive jobs momentum jolted equity markets higher with the Russell 2000 (+1.44%), DJIA (+0.56%), S&P 500 (+0.37%), and NASDAQ (+0.20%) all appreciating on the day. Treasury yields fell for the second straight day; the 10-year yield (-4.66%) hit its lowest end-of-day level since September. Also, on Friday, the House of Representatives (228 to 206) voted to pass the $1.2 trillion infrastructure plan. The larger $1.75 trillion package for social programs and climate change initiatives is now expected to be voted on by November 20.

Monday, November 8, saw the NASDAQ (+0.07%) record its eleventh straight positive daily gain and the S&P 500 (+0.09%) realize its eighth straight—DJIA (+0.29%) and Russell 2000 (+0.23%) also appreciated. Equity markets were boosted by the hope of President Joe Biden taking action in response to rising oil and gas prices. Both crude oil and gasoline prices are flirting with seven-year highs. The White House had no luck in getting OPEC+ members to increase their output, so any action to increase supply will have to come domestically. Oil and gas price increases have led to many input and transportation costs skyrocketing, which in turn has been signaled through consumer inflation figures.

On Tuesday, November 9, equity markets retreated as money flew into the Treasury market. The Russell 2000 (-0.63%), NASDAQ (-0.60%), S&P 500 (-0.35%), and DJIA (-0.31%) all saw their winning streaks end. The two- and 10-year Treasury yields both fell on the day (-8.91% and -4.34%, respectively). The big news Tuesday was the release of the Producer Price Index (PPI). While the PPI increased 8.6% from 12 months ago and 0.6% from last month, the focus should be on the core-PPI (excluding food and energy). Core-PPI increased 6.2% from last year and 0.4% in October. Energy (+4.8%) and transportation (+1.7%) were the key causes of the price increases. While price increases in many areas will be stickier than expected, the large jump in oil prices is largely due to a temporary supply shock—both energy and transportation costs should retreat.

Our fund-flows week wrapped up Wednesday, November 10, with more negative news surrounding inflation. The DOL released the Consumer Price Index (CPI), which jumped 6.2% from 12 months ago and 0.9% from last month. The more significant core-CPI still jumped 0.6% in October and 4.6% from last year. The report showed once again that energy prices remain a huge culprit for the broader price increases as they increased 4.8% in October. President Biden is planning on an increase in crude inventories to help combat the supply shock. Equity markets fell as both Treasury yields and the VIX increased more than 5.0% on the day.

Exchange-Traded Equity Funds

Exchange-traded equity funds recorded $10.2 billion in weekly net inflows. This is the macro-group’s sixth straight week of inflows. Equity ETFs now have two weeks of negative performance over the last three.

Growth/value large-cap ETFs (+$3.9 billion), sector-other ETFs (+$2.9 billion), and growth/value small-caps ETFs (+$1.5 billion) all attracted the weekly net inflows more than $1 billion. Growth/value large-cap ETFs recorded their sixth straight week of net inflows, despite realizing a negative weekly performance (-0.38%). Sector-other ETFs reported their seventh largest weekly inflow to date and largest in more than one year. Growth/value small-cap ETFs observed their fourth straight weekly inflow.

Sector-technology ETFs (-$1.3 billion) and sector-financial/banking ETFs (-$221 million) were the only subgroups to suffer outflows over the week. Sector-technology ETFs have reported their first weekly outflow in four weeks. Sector-financial/banking ETFs have realized two weeks of both negative outflows and performance over the past three.

Over the past fund-flows week, the top two equity ETF flow attractors were: SPDR S&P 500 ETF (SPY, +$1.3 billion) and Invesco QQQ Trust 1 (QQQ, +$1.3 billion).

Meanwhile, the bottom three equity ETFs in terms of weekly outflows were: Select Sector: Technology SPDR (XLK, -$716 million), ARK Innovation ETF (ARKK, -$479 million), and VanEck Semiconductor ETF (SMH, -$439 million).

Exchange-Traded Fixed Income Funds

Exchange-traded fixed income funds recorded $6.2 billion in weekly net inflows—the macro-group’s fifth straight week of inflows. Fixed income ETFs reported a weekly return of positive 0.28% on average—the macro-group’s second week of positive performance in the last three.

Corporate bond ETFs made a comeback this week with corporate-high yield ETFs (+$2.8 billion) and corporate-investment grade fund ETFs (+$1.5 billion) leading the inflows under the fixed income ETF macro-group. After posting a positive 0.41% return, on average, over the fund-flows week, corporate-high yield ETFs recorded their largest weekly inflows since October 2020. Corporate-investment grade ETFs also realized a positive weekly return (+0.11%) as they ended a two-week slump of outflows.

Government-mortgage ETFs (-$119 million) was the only subgroup to record weekly outflows under fixed income ETFs. Government-mortgage ETFs suffered their first weekly outflows since September while depreciating 0.15% on average.

iShares: iBoxx $High Yield Corporates ETF (HYG, +$1.5 billion), SPDR Bloomberg High Yield Bond ETF (JNK, +$849 million), and iShares: iBoxx $Investment Grade Corporates ETF (LQD, +$826 million) attracted the largest amounts of weekly net new money for taxable fixed income ETFs.

On the other hand, iShares: 20+ Treasury Bond ETF (TLT, -$445 million) and PIMCO ETF: 0-5 Year High Yield Corporate Bond (HYS, -$198 million) suffered the largest net weekly outflows.

Conventional Equity Funds

Conventional equity funds (ex-ETFs) were net redeemers for the nineteenth time in 20 weeks (-$1.9 billion). Conventional equity funds posted a weekly return of negative 0.38% on average, marking their second week of negative performance in three.

Domestic conventional equity funds saw outflows this week (-$2.7 billion), marking the twentieth straight week of outflows. Nondomestic conventional equity funds reported a weekly inflow of $820 million, marking their first week of net inflows in three.

For the second week in a row, international equity funds (+$1.2 billion) and sector-real estate funds (+$126 million) led all subgroups in inflows under conventional equity funds. Both subgroups, however, recorded negative weekly performance of 0.68%, and 0.61%, respectively. Sector-real estate conventional funds have now reported five straight weeks of inflows, while international equity funds have reported four in a row.

Similar to last week, growth/value large-cap funds (-$2.0 billion) and growth/value small-cap funds (-$539 million) saw the most money exit conventional equity funds. Growth/value large-cap funds have seen outflows in 71 of their last 72 weeks. The subgroup recorded a negative 0.23% on average over the fund-flows week. Growth/value small-cap funds logged their twenty-first straight week of net outflows as they also suffered negative weekly performance (-0.19%).

Conventional Fixed Income Funds

Conventional fixed income funds realized a weekly inflow of $3.9 billion—their fifth straight week of inflows. The subgroup reported a weekly performance of positive 0.14% on average.

Conventional balanced funds (+$1.3 billion), flexible funds (+$1.1 billion), and corporate-investment grade funds (+$1.0 billion) led the macro-group in inflows. Balanced funds posted their largest weekly inflows since March while logging their fourth straight weekly inflow. Flexible funds have now realized 30 straight weeks of net inflows. Corporate-investment grade funds observed their eightieth week of inflows over the last 82 weeks.

For the second straight week, conventional corporate-high quality funds (-$343 million) and corporate-high yield funds (-$239 million) suffered the largest outflows under conventional fixed income funds. Corporate-high quality funds posted a positive 0.39% weekly performance as they notched their seventh straight week of outflows. Despite recording their second straight week of positive performance (+0.31%), corporate-high yield funds witnessed their second consecutive week of outflows.

Municipal bond funds (ex-ETFs) returned positive 0.43% on average over the fund-flows week. The subgroup attracted $1.2 billion in inflows, marking their third straight week of inflows. Conventional municipal bond funds have only recorded four total weeks of net outflows this year.

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