Bond funds: buying yield, not hikes: US Rates Research: Flow of Funds

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Bond funds: buying yield, not hikes: US Rates Research: Flow of Funds

Barclays | US Rates Research: Flow of Funds

FIGURE 1. Bond fund flows have remained resilient versus past tightening cycles

Orange line shows latest observations, with t0 aligned to the September FOMC, when market-implied probability of a hike

moved decisively above 40%.

Source: EPFR, Barclays Research

Bond fund inflows have rebounded despite a

repricing towards hikes

Bond fund inflows have accelerated sharply since the April lows, marking a notable rebound in

investor demand for fixed income. Fixed income mutual funds and ETFs recorded their largest

monthly inflow in May, with flows remaining robust into June. This has pushed year-to-date

cumulative inflows to above $320bn, roughly double the pace observed over the same

period last year (Figure 2).

The resurgence in demand comes as fixed income yields rose to among some of the most-

attractive levels of the post-GFC period. Average Treasury yields of roughly 4.25% and corporate

yields north of 5% compress the relative appeal of other risk assets while providing investors

with income and carry opportunities that were largely unavailable throughout the past decade

(Figure 3).

However, investor participation remains uneven across sectors: Flows have been concentrated

in short-and-intermediate duration bond funds (Figure 4), while long-term government funds

have attracted comparatively limited demand despite 30y Treasury yields reaching post-GFC

highs (Figure 8). This suggests investors are increasingly willing to add fixed income exposure,

but have largely remained reluctant about taking on large duration risk.

One factor supporting this preference is that instruments at the shorter-end of the curve

continue to offer relatively competitive yields.