Individual investors may finally lose their taste for investment-grade bond funds after suffering near-record losses in the first quarter of the year.
Flows to the asset class hit their lowest level last week in about five months, according to data from Refinitiv Lipper, and some investors are bracing for sharp exits.
Funds that buy bonds from blue chip companies like Coca-Cola Co. and Microsoft Corp. have lost about 4% this year, according to Bloomberg Barclays data, counting price changes and interest payments. Driving the decline: liquidating US Treasury bills, which serve as a benchmark for corporate debt.
Nonetheless, individual investors had continued to invest money, and fund assets rose about 3% since the end of December to $ 1.68 trillion, according to Lipper data. Much of the buying was based on past performance, with investment grade bonds returning 10% in 2020, outperforming almost all other fixed income strategies, according to data from Citigroup Inc.
The wind may be turning. Inflows fell 48% in the last week of March from the previous week to $ 1.7 billion, the smallest amount of net purchases since early November, when they were briefly turned negative, according to Lipper’s data. Four-week average inflows fell to $ 3.4 billion from $ 4.4 billion at the end of February.
BlueBay Asset Management is bullish on U.S. corporate bonds, given the outlook for an economic recovery this year, but has bought swaps to protect against potential outflows of good quality mutual funds that could trigger sales, said said Andrzej Skiba, head of US credit at BlueBay. Asset Management.
“There have been unprecedented inflows into top quality US bond funds,” Skiba said. “Let’s say it’s reversed. It would be absolutely a downside to the market.”
The investment grade bond market may be one of the beneficiaries of the drop in demand for investment grade bonds, which tend to track more stocks than T-bills. High yield bond funds took in about $ 809 million in the last week of March, the biggest influx since early February, according to Lipper.
Of course, sentiment could change if interest rates stop rising for a month or even reverse course. T-bill yields have fallen in recent days, and the 10-year note yield fell as low as 1.628% on Wednesday morning before closing at 1.653%, little changed from Tuesday’s close, according to data from Tradeweb.
This story was posted from an agency feed with no text editing.