October 5, 2017 / 9:38 PM / a year ago

Glimmers of 'reflation' trade in U.S. funds, but no love for stocks

NEW YORK (Reuters) - The Trump administration’s highly anticipated tax plan spurred modest flows into funds that profit from higher interest rates and inflation, Lipper data showed on Thursday, but that resurgent “Trump trade” did not boost stocks.

The White House outlined a proposal last week that would provide $5.99 trillion in tax cuts, according to the first detailed analysis of the plan by the non-profit Washington-based Tax Policy Center.

“If they can get this tax plan passed it would revive inflation because we would get growth,” said Pat Keon, senior research analyst for Thomson Reuters’ Lipper research unit.

The arrival of a plan that could swiftly boost corporate profits was not enough to galvanize reticent investors to buy stocks. U.S.-based equity mutual funds and exchange-traded funds (ETFs) posted $1 billion in outflows during the week ended October 4, according to Lipper, curbing withdrawals of $9.7 billion the week prior.

But fund flows showed flashes of the “reflation,” or “Trumpflation,” trade that drove financial markets after Donald Trump’s surprise U.S. presidential election victory last November. Trump’s promised tax overhaul initially sparked predictions that debt-fueled economic growth and inflation could rise, pushing the U.S. Federal Reserve to accelerate interest rate hikes.

Bond funds invested in government debt that pays out more when inflation rises - which include Treasury Inflation-Protected Securities, or TIPS - attracted $432 million during the week, the most since March. Loan-participation funds, which buy debts that yield more as rates rise, attracted $369 million, the most since June. And financial sector funds pulled in $1.4 billion, marking the largest week of inflows since July, according to Lipper. Banks can earn more in interest from customers when rates are higher.

Yields on 30-year benchmark U.S. government bonds rose from 2.77 on September 26 to 2.89 on Thursday. And the Fed has signaled an expectation to raise the federal funds rate it controls one more time this year. [FED/AHEAD]

Rate-sensitive Treasuries and real estate posted outflows during the week. The government bond funds posted $270 million in withdrawals, while the real estate sector funds posted $524 million in outflows, the most withdrawn since June, according to Lipper. Safe-haven precious metals commodities funds posted $333 million in withdrawals, the first week of outflows since August.

Overall, taxable bond funds attracted $4 billion during the latest week, marking a 13th straight week of inflows, Lipper data for U.S.-based funds showed on Thursday.

Reporting by Trevor Hunnicutt; Editing by Jennifer Ablan and Cynthia Osterman

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