Bond funds remain important attractors of investor assets despite inflation

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Most experts expect the Federal Reserve to start phasing out its short-term easy money policies. And while Fed Chairman Jerome Powell at the end of the annual Jackson Hole Economic on August 27, 2021, “if the economy goes largely as expected, it might be appropriate to start reducing the pace of asset purchases. this year, “he reiterated. the decision to gradually reduce the Fed’s $ 120 billion monthly asset purchases does not mean it will raise interest rates at the same time.

Bond investors have been eagerly awaiting news on the proposed timing of the Fed’s plans to start declining and have been looking for clues as to when rates may start to rise. Investors are worried about the combination of low interest rates and signs of rising inflation. The prospect of higher interest rates, while eagerly awaited, is a double-edged sword that will cause the value of current bonds to fall. Recall the inverse relationship between interest rates and bond prices. Most bond investors hope that the inevitable rate hikes will occur at a slow enough pace that the extra extra yield will offset the decline in value, from a bond fund perspective.

On Friday, September 3, he threw a wrench into the work after reporting that the US economy created just 235,000 jobs in August, well below the 720,000 forecast by analysts. While some investors saw the report as a reason for the Federal Reserve to delay its long-awaited plan to cut back on asset purchases, others were concerned about the combination of a slowdown in hiring and a sudden surge in hires. workforce, a worrying combination for the economy.

Most bond investors are unsure of how to prepare for the end of a 40-year bond bull market. Until recently, bond investors profited from falling interest rates and low relative inflation, resulting in both capital gains and income distributions contributing to total bond fund returns. And that may be about to change.

As America turned gray, proportional asset allocation to equity funds (including ETFs) and bond funds increased dramatically, from just under 14% (+1 400 billion dollars) of all assets under management in the funds industry in the United States. for 2008 at almost 20% (+ $ 6.6 trillion) in 2021 – see dark blue segments in the graph below. Much of this is now on autopilot with automatic monthly investments in 401 (k) and other qualified plans aimed at fixed income mutual funds and ETFs.

TNA-All Fund by Macro Group 1990 YTD 2021

Even as experts continue to sound the alarm bells about the impact that rising interest rates could have on bond funds, investors continue to pump net new money into taxable and tax-exempt bond funds. tax, with the former being the main attractor of investor assets in eight of the past 11 years, including up to the second quarter of 2021.

Annual YTD-ENFs Macro Groups 2011 2021
Annual YTD-ENFs Macro Groups 2011 2021

Concerns over perceived high valuations in the equity market have given taxable fixed income funds the continued advantage over equity funds in the cash flow arena despite concerns about rising interest rates and rising inflation. So far for the third quarter (during the fund flow week ended September 8, 2021), taxable bond funds (including ETFs) have attracted the largest amount of net inflows, with 81.6 billion dollars, followed by equity funds (+ $ 61.2 billion) and municipal bond funds (+ $ 23.4 billion), while money market funds (- $ 36.0 billion) suffered net redemptions.

And while core bond funds (aka investment grade corporate bond funds) have been the main attractor of investor assets since the start of the year, attracting $ 103 billion, we’ve seen an influx recent investors fill the coffers of Short Investment-Grade. Debt Fund (+ $ 51.1 billion, YTD), Inflation-Protected Bond Fund (+ $ 47.8 billion), Multi-Sector Income Fund (+ $ 39.6 billion) and Fund loan participation ($ +33.5 billion) as investors and their advisors seek out fixed income funds that could withstand the nascent rise in interest rates better than other longer-term / duration products higher.

In fact, for the third quarter so far, short-term debt funds have outperformed all other taxable fixed income fund classifications, totaling just under $ 15.8 billion, followed by bond funds. inflation protected (+ $ 10.5 billion), multi-sector income funds (+ $ 9.7 billion), core bond funds (+ $ 7.7 billion) and participation in loans (+ $ 5.7 billion).

We have also seen recent interest in real asset-focused funds and income-focused equities gaining some ground, with income equity funds and sector real estate funds receiving $ 7.9 billion and $ 2.9 billion, respectively. billion dollars, in the third quarter, as investors seek alternatives. income opportunities in a possible environment of rising interest rates.


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