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Investors have pumped record sums into global bond funds this year, as they bet on a shift toward easier monetary policy by major central banks.
Bond funds have attracted more than $600 billion in inflows so far this year, according to data provider EPFR, surpassing the previous high of about $500 billion in 2021, as investors felt slowing inflation would be a turning point for global fixed income.
This was “a year in which investors bet big on a big shift in monetary policy” that has historically supported bond yields, said Matthias Schipper, senior portfolio manager at asset manager Allspring.
He added that a combination of slower growth and slower inflation encouraged investors to invest in bonds with “high” yields.
The record inflows came despite a volatile year for bonds, which rose over the summer before giving up their gains by the end of the year on growing concerns that the pace of global interest rate cuts will be slower than previously expected.
The Bloomberg Global Aggregate Bond Index – a broad measure of sovereign and corporate debt – rose in the third quarter of the year but has fallen over the past three months, leaving it down 1.7 percent for the year.
This week, the Federal Reserve cut interest rates by a quarter of a percentage point, the third straight cut. But signs that inflation is more stubborn than hoped meant the central bank signaled a slower pace of monetary policy easing next year, sending US government bond prices and the dollar falling to a two-year high.
Despite record inflows into bond funds throughout the year, investors withdrew $6 billion in the week ending December 18, the largest weekly outflow in nearly two years, according to EPFR data.
The yield on 10-year US Treasuries – a benchmark for global fixed income markets – is now at 4.5 per cent, after starting the year at less than 4 per cent. Yields rise as prices fall.
Investors piling into bond funds were driven by “broad concerns about a recession (in the US) coupled with declining inflation,” said Shanil Ramji, co-head of multi-asset at Pictet Asset Management.
“While low inflation occurred, recession did not occur,” he said, adding that for many investors, higher initial yields on government bonds may not have been enough to offset price losses experienced during the year.
Corporate credit markets were more flexible, with credit spreads higher than corporate bonds minimum For decades in the United States and Europe. This led to an increase in bond issuance as companies sought to take advantage of easy financial conditions.
Risk-averse investors have also been drawn to fixed-income products, as stocks, especially in the US, have become increasingly expensive, according to James Athey, a bond portfolio manager at Marlboro.
“US stocks have been absorbing inflows like there's no tomorrow, but with interest rates normalizing, investors are starting to return to traditionally safer bets,” he said.
“Inflation has come down pretty much everywhere, growth has slowed pretty much everywhere… This is a much friendlier environment to be a bond investor,” Athey added.
