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Investors poured record amounts into global bond funds this yr as they bet on a shift towards easier monetary policy by major central banks.
Bond funds attracted greater than $600bn in inflows to date this yr, in response to data provider EPFR, topping the previous high of virtually $500bn in 2021, as investors sensed that slowing inflation can be a turning point for global fixed income.
This “was the yr that investors bet big on a considerable shift in monetary policy” that has historically supported bond returns, said Matthias Scheiber, a senior portfolio manager at asset manager Allspring.
A mixture of slowing growth and slowing inflation encouraged investors to plough into bonds at “elevated” yields, he added.
The record flows got here despite a patchy yr for bonds, which rallied over the summer before giving up their gains by the tip of the yr on rising concerns that the pace of world rate cuts might be slower than previously expected.
The Bloomberg global aggregate bond index — a broad benchmark of sovereign and company debt — surged within the third quarter of the yr but has slumped over the past three months, leaving it down 1.7 per cent for the yr.
The Federal Reserve this week lowered rates by 1 / 4 of a percentage point, its third cut in a row. But signs that inflation is proving more stubborn than hoped meant the central bank signalled a slower pace of easing next yr, sending US government bond prices lower and the dollar to a two-year high.
Despite record inflows into bond funds over the course of the yr, investors withdrew $6bn within the week to December 18, the largest weekly outflow in almost two years, in response to EPFR data.
The ten-year US Treasury yield — a benchmark for global fixed income markets — is currently back up at 4.5 per cent, having began the yr below 4 per cent. Yields rise as prices fall.
Investors piling into bond funds were driven by a “widespread fear a few [US] recession coupled with disinflation,” said Shaniel Ramjee, co-head of multi-asset at Pictet Asset Management.
“While disinflation occurred, the recession didn’t,” he said, adding that for a lot of investors, the high starting yields on government bonds may not have been enough to make up for losses in price experienced in the course of the yr.
Corporate credit markets have been more resilient, with credit spreads above corporate bonds reaching their lowest in a long time within the US and Europe. That prompted a surge in bond issuance as firms sought to benefit from easy money conditions.
Risk-averse investors have also been drawn to fixed-income products as equities, particularly within the US, have change into increasingly expensive, in response to James Athey, a bond portfolio manager at Marlborough.
“US equities have been sucking up flows like there’s no tomorrow, but as rates of interest have normalised investors have began to maneuver back into traditionally safer bets,” he said.
“Inflation has come down just about all over the place, growth has softened just about all over the place . . . and that’s a way more friendly environment to be a bond investor,” Athey added.
