Taxable bond funds, including mutual funds and exchange-traded funds, took in $47.7bn during the first quarter of 2018, following a $297.5bn haul in 2017. Last year’s intake is the group’s third highest annual net inflows.
Taxable bond funds continued to look attractive to investors, despite what appears to be an adverse set of current circumstances — the Federal Reserve raising interest rates again in mid-March; the Fed forecasting two more rate increases this year and three more in 2019; stronger inflation data and; and the threat of a trade war with China that could potentially cause the Fed to steepen its current interest-rate forecast.
Despite headwinds for this asset class, it must still look more appealing to investors than the ongoing stock market volatility.
Corporate investment-grade debt funds (+$42.8bn) were responsible for the majority of the inflows during the first quarter.
The largest net outflows belonged to corporate high-yield funds, which saw their coffers shrink by almost $20bn. This activity could have been a function of the widening credit spreads occurring in the first quarter — the BofA Merrill Lynch US High Yield Option-Adjusted Spread grew 21 basis points to 379bps.
The theory is that as credit spreads widen, riskier assets become less attractive, which was proven by the net-negative flows for junk debt (high-yield debt) funds and net-positive flows for high-quality debt funds (investment grade).
The largest individual net inflows among the funds in the corporate investment-grade debt group belonged to two passive products: The Vanguard Total Bond Market II Index Fund (VTBIX, +$6bn) and the Vanguard Total Bond Market Index Fund (VBMFX, +$3.8bn).
The largest individual net outflows within the high-yield peer group belonged to the SPDR Bloomberg Barclays High Yield Bond ETF (JNK, -$3.5bn) and the iShares iBoxx $ High Yield Corporate Bond ETF (HYG, -$3.2bn).