Sat. Nov 27th, 2021

Bond funds enjoyed steady total inflows through 2019 as the continuing bull market in fixed income bonds attracted more investors to seek exposure. Then, in March 2020, when the global impact of the coronavirus pandemic suddenly became apparent, the bond market plunged into turmoil as investors rushed to turn their holdings into cash. Billions flowed from all kinds of fixed income funds.

In a single week, in March 2020, mutual funds and exchange traded funds that invested in bonds suffered $ 109 billion outflow – a new record, led by the highest weekly outflow ever from both investment-grade corporate bond funds and specialist junk bond funds.

The outflow soon reversed as investors regained confidence in the relative safety of government and investment-grade corporate debt.

In 2021, demand was boosted by fast-growing investor interest in sustainable debt – via exchange-traded funds that hold securities based on environmental, social and governance principles – and in inflation-protected securities.

Inflation to mutual funds specializing in ESG investment reached $ 54 billion in the first five months of 2021, according to Morningstar. And inflows to inflation-linked ETFs reached $ 32 billion in the first nine months – more than double the amount they attracted throughout 2020.

These graphs, based on Refinitiv’s global fund flow data, show how the demand for different types of unit-linked funds has changed in response to the pandemic, corporate performance and economic forecasts.

Inflow / outflow bar graph (€ billion) showing government bond funds

After being hit by the March 2020 pandemic, government bonds fell in favor again in the first quarter of this year, as investors worried about higher inflation as economies came out of bounds. Mortgage holders have also expressed concern about the possible downsizing of stimulus packages for the purchase of bonds by central banks. But as bond prices fell sharply, their higher yields made it look like a better safety net – and inflows resumed.

Bar chart of inflows / outflows (€ billion) showing corporate bond funds

After a strong recovery in corporate debt demand by mid-2020, investor sentiment weakened in 2021 over concerns that inflation will drive prices down and boost yields. Like the FT reported late in September, so-called spreads on corporate bonds – the extra returns they offer compared to safe government bonds – are close to their narrowest levels on record. This reduces the room for them to narrow further and mitigate the blow of higher government returns.

Bar chart of inflows / outflows (€ billion) showing high-yield bond funds

Following the March 2020 sales, high-yield – or junk – bonds were seen by many investors as a shelter against the relative volatility in stock and government bond markets. But these more risky possessions began to look less attractive as inflation fears increased, signaling an end to the rally following the major pandemic outflow.

Bar chart of inflows / outflows (€ billion) showing inflation-linked bond funds

Money flowed into inflation-protected government bonds in the first half of this year amid expectations of higher commodity and consumer prices. In the US, this buying activity has lifted the yield of inflation-linked bonds above yields of other types of US debt security. U.S. Treasury inflation-protected securities – bonds that compensate investors for rising prices – generated returns, including interest payments of 3.9 percent in the year to August. In contrast, even high-yield junk bonds yielded only 3.6 percent.

Bar chart of inflows / outflows (€ billion) showing emerging market bond funds

By early 2021, emerging market effects seemed to be back in vogue, bolstered by hopes of Covid vaccine deployment and a new trade-friendly US administration. But more recently, analysts have predicted weaker growth in emerging markets due to the Covid Delta variant, a lack of vaccine supplies and restrictions on government spending in the region.

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