Why are investor flows in high-grade bond funds trending positive?

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Secondary market activity in investment-grade bonds

Due to the increase in Treasury yields last week, yields on corporate bonds[1. As measured by the BofA Merrill Lynch US Corporate Master Effective Yield] rose by four basis points (or bps) over the week to 3.0% on October 24. Average investment-grade bond credit spreads[2. As measured by the BofA Merrill Lynch US Corporate Master Option-Adjusted Spread] fell by one bp over the week to come in at 1.27% on October 24.

The decline in spreads was due largely to lower-risk perceptions. Better-than-expected earnings and an improving economy implied corporate borrowers would have a lower degree of difficulty discharging their debt obligations. Hence, their average spreads over Treasuries declined.

Part 9

ETF comparisons: Stock market ETFs outperform bonds

The prices of the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and the iShares Core Total US Bond Market ETF (AGG) were down by 0.2% each over the week.

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Exchange-traded funds (or ETFs) tracking broad-based stock market indices were up, however, due to positive economic and earnings data (refer to Parts 6 and 7). The iShares Core S&P 500 ETF (IVV) and the SPDR MSCI World Quality Mix ETF (QWLD) were up by 4.2% and 2.0%, respectively, over the week ending October 24.

Secondary market flows

Secondary market flows into investment-grade bond mutual funds were positive for the 19th consecutive week. Investors poured in about $390.9 million into investment-grade bond mutual funds in the week ending October 22 (Source: Lipper). Heightened geopolitical tensions this year, higher market volatility over the past couple of weeks, and concerns over global growth have largely kept inflows in positive territory.

The Vanguard Total Bond Market ETF (BND) recorded net inflows of $3.9 billion in September 2014 and more than $11 billion in inflows in the 12 months up to September 2014. September’s windfall was due largely to Bill Gross’s exit from PIMCO, which resulted in massive investor exits from PIMCO-sponsored funds, including more than $17 billion from PIMCO’s flagship Total Return Fund (Source: Morningstar).

Six-month Treasury bills auction

The next section will discuss the key takeaways from last week’s six-month Treasury bills auction.

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