Investor flows in high-grade bond funds belie rate rise worries


Nov. 26 2019, Updated 10:44 a.m. ET

Returns on investment-grade bonds in the week ended September 12

Treasury yields and yields on U.S. corporate bonds usually move in the same direction in response to economic data. Due to the factors described in the previous part of this series, yields on corporate bonds rose over the week. The BofA Merrill Lynch US Corporate Master Effective Yield rose by 12 basis points to 3.14% on September 12.


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Bond prices fall when yields rise and vice-versa. Returns were negative as a result. The BofA Merrill Lynch US Corp Master Total Return Index Value declined by 0.61% over the week. The index is up by 5.61% this year, though, due to the higher demand for U.S. investment-grade debt and the Fed’s continued monetary accommodation.

ETF comparisons

The price of the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) was down by 1.15% over the week. The iShares Core Total U.S. Bond Market ETF (AGG) and the Vanguard Total Bond Market ETF (BND) were down by 0.68% and 0.66%, respectively.

ETFs tracking broad-based stock market indices were also down, due to market apprehensions over the Fed’s upcoming FOMC (refer to Part 14). The SPDR S&P 500 ETF (SPY) was down by 0.98%, while the PowerShares QQQ (QQQ) was down by 0.41%.


Secondary market flows from investment-grade mutual funds

Investor flows into mutual funds are key momentum indicators. Although they lag market movements, they signal investor sentiment. Investment-grade mutual funds saw net inflows of ~$934.1 million in the week ended September 10. This marked the 13th straight week of inflows. This brings the year-to-date flows to $53.1 billion.

Investors have continued to pile into investment-grade bond ETFs due to geopolitical crises in hotspots like Ukraine and the Middle East. The start-and-stop nature of the recovery has also generated concerns among some market participants, who have preferred the safe haven nature of high-quality bonds. These have been major factors driving investor flows over the past few months.


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