U.S. Federal Reserve Chair Jerome Powell, Bank of England Governor Andrew Bailey, and Bank of Canada Governor Tiff Macklem take a break outside the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming, U.S., August 23, 2024. REUTERS/Ann Saphir – RC2RL9ALLSX2
After some down time, we are bringing back weekly analysis of the U.S. fund market. In this weekly piece I’ll be touching on market events, FTSE Russell index performance, and overall trends using LSEG Lipper data—focusing more on the fixed income fund market.
The general layout will go as follows: a recap of relevant macro events, followed by a table summary of the latest fund market data, then lastly some commentary. The commentary will either focus on the overall weekly numbers or a specific classification/macro-group trends.
If there are any follow-up questions on the data/products presented or specific insights you’d like to see in future pieces feel free to reach out or message me on social media.
In The News
All calendars circled Friday as a pivot moment which will either support the growing momentum for interest rate cuts in September or keep the “higher for longer” story alive. The harbinger being Federal Reserve Chair Jerome Powell’s speech in Jackson Hole, in which he did not mince words,
“The upside risks to inflation have diminished. And the downside risks to employment have increased….The time has come for policy to adjust.”
While we still have a handful of economic reports (Q2 GDP, PCE, JOLTS, Payrolls, and CPI) between today and the September Federal Open Market Committee (FOMC) meeting so anything can happen, but market sentiment has turned from “likely September cut” to now “how large of will the cut be?”
If I have learned anything over the past four years, it is that market consensus has been wrong more than right and to expect the unexpected. Let’s not forget that we are still on a tightrope, if the Fed cuts rates too fast they risk more permanent inflation, but too slow then the probability of a hard landing increases—a task that is difficult enough without political pressures from the oncoming election.
There is one Powell moment that always stands out to me when forecasting his actions; during a congressional hearing in 2022 Powell called Paul Volcker “one of the great public servants of the era.” Volcker, a former Fed Chair, aggressively fought inflation in the 70s by bringing interest rates to painful levels and ultimately sent unemployment to double digit figures in the early 80s. During this hearing, Powell was asked if the Fed was prepared to do whatever it took to control inflation, even hurting economic growth. His response,
“I hope that history will record that the answer to your question is yes.”
So, a lot can change in the 23 days until the September FOMC meeting. But as it stands, the CME Fed Watch Tool is giving a 69.5% probability of a 25-basis point (bps) cut and a 30.5% probability of a 50-bps decrease.
Fund Market Summary
Commentary
The $6.0 trillion question every asset manager is wondering—what is it going to take for investors sitting in money markets get back in the market? Well, I can tell you that over the last Lipper Fund Flows Week (which is Thursday through Wednesday), investors added another $14.6 billion to the sideline coffers. Looking at daily flows from Thursday, the market saw another $14.2 billion of net new capital enter money markets leading up to the Jackson Hole speech—that’s roughly another $33.7 billion over the six trading days prior to Friday!
But has the risk-on trade started? On Friday alone money market funds reported $29.9 billion of outflows.
Weekly Flows by Fixed Income Macro Group & Corresponding FTSE Index Performance
Moving to the fixed income fund universe, fixed income ETFs attracted $5.9 billion over the last fund flows week, while fixed income mutual funds suffered $424 million in outflows. Tax-exempt fixed income ETFs pulled in $68 million, as their mutual fund counterpart saw $445 million in weekly net inflows.
Looking more closely at the recent trends in the fixed income fund market, we’ll break up the analysis by active and passive flows. First let’s focus on the active space, below are the top five weekly inflows by Lipper classifications over the last week along.
Top Weekly Inflows – Active Fixed Income
Active flows are not going long duration, but instead are leaning into higher yielding and more tactical solutions. The tradeoff is that by accepting higher income, you must take on higher credit risk (and pay the fund’s higher expense ratio, on average). The bet here is that professional managers can help make a potential hard landing a bit smoother.
The Multi-Sector Income classification has been a popular active classification all year. It is made up of funds that take on a tactical allocation strategy among several different fixed income sectors, with no more than 65% in any one sector except for defensive purposes. These funds tend to have a significant portion of assets in high yield securities—a predominant feature of the remaining top destinations for active flows. Core Plus Bond Funds is simply your Core Bond classification but with a larger allocation to securities rated below investment grade.
On the passive side, investors are focusing more on the duration side of the equation. If we are at peak interest rates and rates start to fall, investors not only capitalize on the attractive starting yield levels but also the price appreciation as the market moves into a falling rate environment. Below are the top classifications in inflows last week using passively managed funds only.
Top Weekly Inflows – Passive Fixed Income
The top attributors to inflows within these classifications are funds specifically focused on the intermediate or long end of the curve with an emphasis on higher quality—outside of the High Yield Funds classification of course.
While the headlines have been surrounding active fixed income, thanks to record active ETF launches and strong February through April flows, passive fixed income strategies remain the primary destination for investors.
Over the next month, I’ll focus on one fixed income classification or macro-group each week that has been in the spotlight for U.S. investors. The first two being General U.S. Treasury Funds and Municipal Debt Funds (both national and single-state)—each of which have not only seen strong growth this year but are classifications that have plenty of room for product innovation. Maybe the answer to the $6.0 trillion question has not been launched yet?
Again, if you’re interested in a specific Lipper classification, FTSE index or want me to highlight something more specific feel free to reach out!
Twitter: JackRFischer
LinkedIn: Jack Fischer – Product & Research – FTSE Russell, An LSEG Business | LinkedIn
Email: jack.fischer@lseg.com
