U.S. bond funds rake in more money despite inflation fears

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Net inflows to US bond funds far exceeded those of comparable equity instruments this year, believing expectations that inflation fears would erode the attractiveness of fixed income.

Bond mutual funds and exchange-traded funds added $ 372 billion as of June 23, compared to a gain of $ 160 billion for stocks, according to the Investment Company Institute. Bond funds are poised to eclipse the $ 446 billion in fundraising in 2020 and $ 459 billion in 2019.

Analysts have attributed the popularity of bond funds – which do not include money market holdings – to concerns about high valuations of stocks and an aging population’s need for stable income during retirement.

“Financial advisers follow asset allocation models and portfolio rebalancing and demographics are strong trends,” said Shelly Antoniewicz, senior director of financial and industry research at ICI. “The cumulative flow to bond funds corresponds well to the percentage of the population over 65.”

The preference for fixed income came from the fact that stocks outperformed bonds. The S&P 500 has gained 15.9%, including dividend reinvestment, so far in 2021, and commands the most costly assessment since the Internet boom in 2000.

Total yields on investment grade government and corporate bonds remain negative this year. Their performance was hit hard as US 10-year bond market interest rates rose in early 2021 amid expectations that large-scale fiscal and monetary stimulus would lead to a strong economic recovery – and an economic downturn. higher inflation.

Financial advisers have played a role in boosting bond funds by encouraging clients to maintain a balance between stocks and fixed income. Periodic portfolio rebalancing is about selling the assets that are doing well and buying those that are lagging behind. Pension plans have also moved from stocks to long-term bonds to meet the needs of retirees.

“Pension plans today are at much better funding levels and this is a prudent strategy to lock in their equity gains and immunize the portfolio against the risk of a significant drop in equities,” said Mark Vaselkiv, Director of Fixed Income Investments at T Rowe. Price. “We expect a further rotation into bonds from asset distributors.”

High Yield Debt Bar Chart is a positive point in Fixed Income (Total Return,%), showing stocks are leaving the bond market lagging behind in 2021

Erin Browne, portfolio manager of multi-asset strategies at Pimco, said that higher interest rates in the United States than in Europe or Japan had also provided “a powerful driver of foreign demand to buy US fixed income securities “.

US bond flows this year have been split between mutual funds and ETFs. Investors have favored actively managed funds that can mitigate losses due to rising market interest rates as well as inflation-protected bonds, floating rate debt and municipal papers that provide tax-free income.

Equity investors preferred ETFs over mutual funds, which have seen cash outflows this year, according to ICI.


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