Investors pump record $22.5bn into US bond funds

Investors pumped a record $22.5bn into US bond funds in the week to Wednesday as they shifted out of haven money market accounts to riskier but higher paying investments.

The cash infusion into US bond mutual and exchange traded funds was the most since 2007, when the data provider EPFR began tracking the figures.

Investment grade corporate bond funds counted $5.5bn of inflows in the week, while funds that buy investment grade corporate bonds and government debt received $7.5bn in inflows.

Junk bond funds attracted $8.5bn, falling just short of the weekly record set in April.

“We’re seeing a major reversal of the extreme risk-off behaviour we saw a few months ago,” said Max Gokhman, head of asset allocation for Pacific Life Fund Advisors. The activity has been helped by the big rally in US stocks since March, he said. “Usually bonds lead equities but in this case I think equities are leading bonds.”

Column chart of Weekly equity mutual and exchange traded fund flows ($bn) showing US bond fund inflows hit record driven by demand for corporate debt

The inflows reflect an exodus from money market funds, which suffered $36bn in outflows for the week, according to the Investment Company Institute, an industry body that tracks the funds. The outflows were concentrated on funds that invest only in government debt, and were softened by $7bn flowing into “prime” funds that invest in short-dated corporate debt.

The demand for credit funds also reveals a hunger for yield among investors with short-term interest rates falling to almost zero.

“The markets are rallying everywhere,” said Monica Erickson, a portfolio manager at DoubleLine Capital. “I’m not sure if investors care about putting their money in something that yields zero.”

Investors, including Ms Erickson, pointed to the Federal Reserve’s response to the financial market turmoil. The US central bank has started buying exchange traded funds that invest in corporate bonds and is poised to launch a facility that will buy debt from companies directly.

Just the announcement of its moves into credit was enough to put an end to a painful sell-off in corporate bond markets. Yields on investment grade corporate debt, which fall when bond prices rise, have dropped more than 2 percentage points from a March high, according to Ice Data Services.

“Flows are migrating toward areas of Fed support, hence demand for investment grade corporates and high-yield bonds,” said Steven Oh, the global head of credit and fixed income at PineBridge. “Investors are ignoring near-term economic conditions and optimistically looking forward to an expected recovery, along with confidence in the Fed’s willingness to backstop downside risks.”

The inflows also come during a rush of corporate bond issuance that has surpassed $1tn as companies raise capital to help them through the drop in economic activity caused by the shutdowns to quell the spread of Covid-19.

On Monday, Amazon was able to secure the lowest cost of borrowing on record for US corporate debt. The online retailing giant issued $10bn of bonds with an interest rate of just 0.4 per cent in a deal that was three times oversubscribed.

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