Why Bill Gross’ exit from PIMCO affected mutual fund flows

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Nov. 20 2020, Updated 11:29 a.m. ET

Investor flows into high-grade bond funds

Investor flows into high-grade bond funds (LQD) (AGG) (BND) were a whopping $3.1 billion in the week ended October 1. This marked the 16th consecutive week of positive flows into the asset class. Year-to-date inflows now stand at $58.3 billion. Net inflows were $1.7 billion in the week ended September 24.

External factors influencing investor flows

There were several reasons why inflows spiked. The most recent event was undoubtedly Bill Gross’s exit from Pacific Investment Management Company, LLC (or PIMCO), announced on September 26. Bill Gross has been a legendary figure in bond markets ever since he co-founded PIMCO in the 1970s. Mass exits from PIMCO’s bond funds followed the announcement.

Gross’s departure influenced investor flows into the relative safety of other corporate investment-grade bond funds. For more on Bill Gross’s exit from PIMCO, please read the Market Realist series, Who will benefit from Bill Gross’s move from PIMCO to Janus?

Secondly, with volatility spiking last week (VXX) on domestic and international factors (see Part 10), a number of investors sought refuge in safer assets such as Treasuries (TLT) and corporate investment-grade bonds.

Outlook

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Meanwhile, although mutual fund flows are key indicators of investor momentum, they usually lag broader market movements. The past few months has seen investors piling into these funds. Why? For one, there was no immediate prospect of a rate hike. Second, overseas geopolitical risks were high. And third, credit risks were low due to an improving economy.

In the coming months, yields are likely to trend higher as the Fed moves closer to ending the taper and tightening monetary policy. Inflation is another major factor determining bond yields, especially at the long end of the curve. Higher inflation increases nominal bond yields. Although inflation has shown few signs of edging up towards the Fed’s 2% goal, improvements in the labor market are likely to fuel inflation at some point in the future.

Bond prices and yields move in opposite directions. The prospect of higher yields and falling bond prices may shift investor flows into sectors which tend to perform well when rates are rising, such as the financial and technology sectors. For more on these sectors, visit our Tech, Media & Telecom and Financials sector pages.

The timing of the rates increase isn’t done and dusted. Economic data released last week pointed to signs that the rate hike may come in later rather than sooner. For more on these data, read Market Realist’s article, Federal funds rate hike: Market has “considerable time” to wait.

For more bond market trends and analysis, please visit Market Realist’s Fixed Income ETFs page.

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