Bond funds had benefited from steady cumulative inflows throughout 2019, as the continued bull market in fixed income prompted more investors to seek exposure. Then, in March 2020, as the global impact of the coronavirus pandemic suddenly became clear, the bond market fell into turmoil as investors rushed to turn their holdings into cash. Billions came out of all kinds of fixed income funds.
In a single week, in March 2020, mutual funds and exchange-traded funds that invested in bonds suffered outflows of $ 109 billion – a new record, which was led by the highest weekly outflows. record high levels of investment grade corporate bond funds and specialist waste. bond funds.
Capital outflows quickly reversed as investors regained confidence in the relative safety of government debt and investment grade corporate bonds.
In 2021, demand was then stimulated by growing investor interest in sustainable debt – via exchange-traded funds that hold bonds based on environmental, social and governance principles – and for securities protected against the risk. inflation.
Flows to bond funds specializing in ESG investments reached $ 54 billion in the first five months of 2021, according to Morningstar. And flows to inflation-indexed ETFs reached $ 32 billion in the first nine months, more than double the amount they attracted in all of 2020.
These charts, based on Refinitiv’s global fund flow data, show how demand for different types of bond funds has changed in response to the pandemic, company performance and economic forecast.
After being hit by the pandemic crisis of March 2020, government bonds fell out of favor again in the first quarter of this year as investors worried about higher inflation as economies emerge from foreclosure. Bondholders have also expressed concern about the possible scaling back of central bank bond-buying stimulus packages. But, as bond prices fell sharply, their higher yields made them look like a better safety net – and inflows resumed.
After a strong rebound in demand for corporate debt in mid-2020, investor sentiment weakened in 2021 over fears that inflation could lower prices and raise yields. As the FT reported in late September, so-called corporate bond spreads – the extra yield they offer over safe government bonds – are near their lowest levels on record. This reduces the possibility for them to shrink further and soften the blow of rising public yields.
After the March 2020 liquidation, high yield – or junk – bonds were seen by many investors as a hedge against the relative volatility of the equity and government bond markets. But those riskier holdings started to look less attractive as inflation fears mounted, suggesting the end of the recovery seen after the great pandemic exits.
Money poured into inflation-protected government bonds in the first half of this year, amid expectations of rising commodity and consumer prices. In the United States, this buying activity has raised the yields of inflation-linked bonds above the yields of other types of US debt securities. Inflation-protected U.S. Treasury securities – bonds that compensate investors for rising prices – generated returns, including interest payments, of 3.9 percent during the year to in August. In contrast, even junk high yield bonds only returned 3.6%.
In early 2021, it looked like emerging market bonds were back in fashion, boosted by hopes of a Covid vaccine rollout and a new trade-friendly US administration. But, more recently, analysts predicted weaker growth in emerging markets due to the Covid Delta variant, a lack of vaccine supplies and constraints on government spending in the region.