Bond funds had record inflow as Iran crisis spiralled

Column chart of Weekly net flows into bond mutual funds and exchange traded funds ($bn) showing Bond funds top inflow record

Global investors pumped a record amount of cash into fixed-income funds for the week ending Wednesday, after the threat of war prompted them to seek shelter in safe havens.

Fixed income mutual funds and exchange traded funds around the world took in $23.2bn, the largest total in data going back to 2001, according to EPFR Global.

The activity included inflows of $15bn into US bonds, led by $8.4bn flowing into funds that invest in US investment grade corporate debt and mixed funds that include corporate debt and government bonds. It was the highest weekly tally since 2011 for US investment grade and mixed funds.

The stampede into global bonds came in the wake of the assassination of Qassem Soleimani, Iran’s most senior general, on Friday and retaliatory missile strikes from Iran on Tuesday.

At the global level, equities suffered the most outflows in two weeks, at $541m, weighed down by $4.8bn leaving US stock funds.

The Middle East tensions initially sent oil prices higher and the yield on the benchmark 10-year US Treasury bond to a one-month low of 1.7 per cent. Yields fall as bond prices rise.

Investors did an about-face hours after the Iranian retaliation, however, once it became clear the risk of an overt confrontation had diminished. By Thursday, the 10-year yield had climbed to 1.85 per cent, and the S&P 500 notched up another record high.

The demand for bonds was also propelled by investors selling equities to rebalance portfolios after 2019’s bumper run for the US stock market, where the S&P 500 index gained 29 per cent.

“If the stock market goes up double digits, those contributions outstrip any increase in fixed income,” said Robert Tipp, head of global bonds for PGIM Fixed Income, explaining why many investors will have moved to top up their bond allocations.

Bonds also had a strong year in 2019, unusually for a period when equities were doing so well. The Bloomberg Barclays Global Aggregate bond index, a broad measure of the fixed income market, gained 6.8 per cent, its second-best year in a decade.

According to Jim Caron, senior portfolio manager for global fixed income at Morgan Stanley Investment Management, fixed-income assets are unlikely to enjoy such robust performance in 2020.

“It is hard to repeat what we saw last year,” he said. “Yields and spreads were higher a year ago, so [fixed income] was a much more attractive asset class to own.”

Jason Draho, head of Americas asset allocation at UBS Global Wealth Management, said equity funds could reap much of the benefit.

“Loose monetary policy, with inflation low and growth rebounding, is a good environment for equities to do well,” he said.

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