June 2, 2022

U.S. Weekly FundFlows Insight Report: Government-Treasury Funds Suffer First Outflow in Two Months as Quantitative Tightening Begins

by Jack Fischer.

During Refinitiv Lipper’s fund-flows week ended June 1, 2022, investors were overall net redeemers of fund assets (including both conventional funds and ETFs) for the fourth week in five, withdrawing $3.6 billion.

Money market funds (-$12.4 billion) reported weekly outflows, while equity funds (+$7.4 billion), tax-exempt bond funds (+$1.2 billion), and taxable bond funds (+$262 million) attracted inflows.

Index Performance

At the close of Refinitiv Lipper’s fund-flows week, U.S. broad-based equity indices traded positive for the second week straight—Nasdaq (+4.89%), Russell 2000 (+3.09%), S&P 500 (+3.08%), and DJIA (+2.16%).

Fixed income indices traded mixed following their first weekly gain in 11 weeks. The Bloomberg Municipal Bond Total Return Index (+1.53%) finished in the black for the second straight week as the Bloomberg U.S. Aggregate Bond Total Return Index (-0.72%) fell over the week.

Overseas broad market indices traded mostly positive as well—Dax 30 (+2.25%), Shanghai Composite (+2.07%), Nikkei 225 (+0.88%), and FTSE 100 (-0.26%).

Rates/Yields

The 10-two Treasury yield spread rose over the week (+8.98%). Treasury yields along the yield curve increased—the two- (+6.47%), five- (+8.21%), 10- (+6.70%), and 30-year (+3.78%).

The Mortgage Bankers Association reported the 30-year fixed-rate average declined for the fourth time in five weeks to 5.33%—still hovering around the highest level since 2009. The United States Dollar Index (DXY, +0.43%) appreciated as the VIX (-10.35%) decreased over the course of the week.

Market Recap

Our fund-flows week kicked off Thursday, May 26, with the release of the Federal Reserve’s May meeting minutes. The notes spelled out a road map for the next two meetings as combating inflation remained their primary task. It is widely expected the Fed will hike interest rates by another 50 basis points in June and July, after which Fed actions will likely revert to being data-driven. The National Association of Realtor’s (NAR) Pending Home Sales Index (PHSI) fell to 3.9% in April, marking the sixth straight month of declines and its longest such streak since 2018. U.S. equity markets posted a positive day with the Nasdaq (+2.68%) and Russell 2000 (+2.17%) leading the way. Macy’s, Dollar Tree, Dollar General, and Williams-Sonoma all reported better-than-expected quarterly results which alleviated retail concerns.

U.S. equity indices ended the week on May 27 very strong—Nasdaq (+3.33%), Russell 2000 (+2.70%), S&P 500 (+2.47%), and DJIA (+1.76%). This was the best calendar week for the DJIA and S&P 500 since November 2020. Major news from the Department of Commerce showed that the Personal Consumption Expenditures Index (PCE, the Fed’s preferred gauge of inflation) increased just 0.2% in April, down from a 0.9% gain in March. The year-over-year increase was 6.3%, still more than three times the Fed’s ideal level. The report also detailed a 0.9% increase from last month in U.S. consumer spending and a 0.6% increase in wages, showing the U.S. economy may be more stable than originally anticipated. Treasury yields were largely unchanged—the two- (+0.40%) and 10-year (-0.33%).

On Monday, May 30, U.S. markets were closed in recognition of Memorial Day.

On Tuesday, May 31, U.S. equity markets ended their nice three-day run—Russell 2000 (-1.26%), DJIA (-0.67%), S&P 500 (-0.63%), and Nasdaq (-0.41%). The Conference Board’s index on consumer confidence fell to 106.4, marking a three-month low. Overseas, the eurozone reported that annual inflation spiked to an all-time high. U.S. Treasury yields jumped on the day, the two- and 10-year yields increased by 1.68% and 3.46%, respectively.

Our fund-flows week wrapped up Wednesday, June 1, on the first day of the Federal Reserve’s quantitative tightening, which is the Fed’s plan to let bonds mature off its balance sheet without any more additional asset purchasing. The central bank purchased bonds from March 2020 to March 2022 with the intention to curb economic woes following the COVID-19 pandemic. The expectation now is that the yield curve will steepen with rates rising as liquidity is pulled from the market and volatility remains high. The Department of Labor published its Job Openings and Labor Turnover Survey (JOLTS) which reported that 11.4 million positions were available at the end of April (down from March’s 11.9 million), signaling the first monthly decline since January. Those who quit their jobs also fell (from 4.5 million to 4.4 million), however still registered as the third-largest monthly total on record. U.S. equity markets fell for the second consecutive day—S&P 500 (-0.75%), Nasdaq (-0.72%), DJIA (-0.54%), and Russell (-0.49%). The two- and 10-year Treasury yields also jumped for the second straight session, 4.88% and 3.06%, respectively.

Exchange-Traded Equity Funds

Exchange-traded equity funds recorded $11.9 billion in weekly net inflows, marking their fifth weekly inflow in a row. The macro-group posted a positive return of 2.72% on the week.

Growth/value-large cap ETFs (+$5.7 billion), equity income fund ETFs (+$1.8 billion), growth/value-small cap ETFs (+$1.4 billion), and sector-healthcare/biotech ETFs (+$996 million) were the largest equity ETF subgroups to post inflows this week. Growth/value-large cap ETFs have logged four straight weekly inflows as they realized a positive 3.38% on the week. Equity income funds ETFs have put up 11 straight weeks of positive inflows while posting their third positive weekly performance straight (+1.29%).

Sector-financial/banking ETFs (-$1.1 billion) and gold and natural resources ETFs (-$73 million) were the only flow detractors under the macro-group. Sector-financial/banking ETFs suffered their sixth straight weekly outflow, despite three consecutive weeks of positive weekly performance. The subgroup logged its fourteenth straight week with a negative four-week flow moving average.

Over the past fund-flows week, the top three equity ETF flow attractors were SPDR S&P 500 ETF (SPY, +$2.9 billion), iShares: Core S&P 500 (IVV, +$1.9 billion), and Select Sector: Health Care SPDR (XLV, +$912 million).

Meanwhile, the bottom three equity ETFs in terms of weekly outflows were Invesco QQQ Trust 1 (QQQ, -$1.9 billion), Select Sector: Financials Sector SPDR (XLF, -$787 million), and  JPMorgan: BetaBuilders Europe (BBEU, -$742 million).

Exchange-Traded Fixed Income Funds

Exchange-traded fixed income funds observed $3.7 billion in weekly net inflows—the macro-group’s seventh straight week of inflows. Fixed income ETFs reported a weekly return of negative 0.19% on average—the macro-group’s twelfth week of sub-zero performance over the last 13.

Corporate-high yield ETFs (+$2.1 billion), flexible funds ETFs (+$758 million), and corporate-investment grade ETFs (+$692 million) were the top attractors of capital under fixed income ETFs. After posting back-to-back weeks of plus-side performance, corporate-high yield ETFs have logged two consecutive weeks of inflows for the first time since the first week of the year.

Government-mortgage ETFs (-$53 million), balanced funds ETFs (-$12 million), and government-Treasury ETFs (-$2 million) witnessed the only outflows under the fixed income ETF macro-group. Government-Treasury ETFs realized their first weekly outflow in nine weeks and only their fifth net outflow all year.

After coming off their largest weekly inflow on record, municipal bond ETFs reported an $891 million inflow during the week, extending their weekly intake streak to six. The subgroup realized a positive 1.88% on average.

SPDR Bloomberg High Yield Bond ETF (JNK, +$1.0 billion) and iShares: 1-3 Treasury Bond ETF (SHY, +$704 million) attracted the largest amounts of weekly net new money for taxable fixed income ETFs.

On the other hand, iShares: TIPS Bond (TIP, -$790 million) and PIMCO ETF: Enhanced Short Maturity Active ETF (MINT, -$368 million) suffered the largest net weekly outflows.

Conventional Equity Funds

Conventional equity funds (ex-ETFs) witnessed weekly outflows (-$4.5 billion) for the sixteenth straight week. Conventional equity funds posted a weekly return of positive 2.66%, marking their highest return since the first week of February. This is the fourteenth straight week the macro-group has observed a four-week outflow moving average of more than $2.2 billion and is on pace to record its largest monthly outflow since December 2021.

International equity (-$1.6 billion), growth/value-large cap (-$1.5 billion), and global equity (-$543 million) were the largest subgroup outflows under conventional equity funds for the second straight week. International equity conventional funds have suffered seven straight weeks of outflows, all greater than $1.4 billion. The subgroup is on pace for its largest monthly outflow since February 2021.

Sector-other funds (+$110 million), convertible & preferreds (+$95 million), and equity income funds (+$29 million) were the top attractors of capital over this fund-flows week. Sector-other conventional funds have reported 10 weeks of inflows in the past 11. The subgroup has realized three straight weeks of positive returns, recording a positive 0.74% this week.

Conventional Fixed Income Funds

Conventional taxable-fixed income funds realized a weekly outflow of $3.4 billion—marking their nineteenth straight week of outflows. The subgroup has produced a negative four-week flow moving average of at least $1.3 billion in 18 consecutive weeks. The macro-group recorded a positive 0.46% on average—their second week of plus-side performance in a row.

Corporate-investment grade (-$3.7 billion), balanced funds (-$666 million), and government-Treasury & mortgage funds (-$509 million) led the macro-group in outflows. Conventional corporate-investment grade funds now suffered 16 consecutive weeks of outflows; all 16 weeks have been larger than $1.5 billion. The subgroup has posted a negative weekly performance in 12 of the last 13 weeks.

Corporate-high yield funds were the only subgroup to log a weekly inflow (+$2.7 billion), marking the largest weekly inflow in one year and the eighth largest intake on record. The subgroup realized a positive 2.06% on the week on average.

Municipal bond funds (ex-ETFs) returned a positive 1.69% over the fund-flows week—their second consecutive positive weekly performance. The subgroup experienced $325 million in inflows, marking its first week of inflows in 13. The subgroup has logged 18 straight weeks with a four-week moving outflow average of greater than $1.1 billion. Conventional municipal bond funds only recorded five total weeks of net outflows in all of 2021.

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