April 25, 2018 / 8:40 PM / a year ago

U.S.-based bond funds garnered new cash for ninth straight week: ICI

NEW YORK (Reuters) - U.S.-based bond funds attracted new cash in the week ended April 18, marking their ninth consecutive week of inflows, Investment Company Institute data showed on Wednesday, but rising interest rates could derail the momentum.

Investors poured $8.49 billion into bond funds in the week ended April 18, following inflows of $6.47 billion the previous week and $2.94 billion in the week ended April 4, ICI said.

“We won’t know if the rise in the 10-year (yield to over 3 percent) is impacting fund flows this week,” said Tom Roseen, head of research services at Thomson Reuters Lipper.

This week, the benchmark U.S. Treasury 10-year yield, a benchmark for global borrowing costs, crossed the critical 3 percent threshold. Increased government borrowing, together with inflation concerns due to rising commodity prices and bets on further rate increases from the Federal Reserve, have touched off the current bond market sell-off, with the 10-year yield currently trading around 3.03 percent.

Roseen said the insatiable appetite for yield has spurred investors into bond funds in the face of Federal Reserve tightening. Year to date, taxable bonds have attracted $68.2 billion, while equity funds have taken in $67.3 billion, according to Lipper data.

TrimTabs Investment Research also provided staggering figures: In the first quarter, bond mutual funds and Exchange-Traded Funds took in $74.1 billion, nearly four times the inflow of $20.6 billion “into key savings vehicles, even though bonds delivered negative returns and yields on savings vehicles continued to increase,” said David Santschi, director of liquidity research at TrimTabs.

“From a contrarian perspective, fund flows suggest borrowing costs are going to rise much more over the longer term than the conventional wisdom expects,” Santschi said.

Investors have also shown interest in commodity funds, which tend to do well during late-cycle recoveries. Those funds had estimated inflows of $167 million for the week, compared with estimated inflows of $1.12 billion in the previous week, according to ICI data.

Equity funds had estimated outflows of $291 million for the week, compared with estimated inflows of $5.21 billion in the previous week. Domestic equity funds had estimated outflows of $2.42 billion, and world equity funds had estimated inflows of $2.13 billion, according to ICI.

Hybrid funds, which can invest in stocks and fixed-income securities, had estimated outflows of $1.09 billion for the week, compared with estimated outflows of $1.10 billion in the previous week, ICI said.

The following table shows estimated ICI flows for mutual funds and ETFs (all figures in million of dollars):

  4/18 4/11 4/4   3/28 3/21

Equity -291 5,213 -4,499 -11,674 -13,766

Domestic -2,416 3,776 -6,016 -12,377 -17,107

World 2,125 1,437 1,517 703 3,341

Hybrid -1,089 -1,099 -930 -1,314 151

Bond 8,492 6,470 2,943 263 5,315

Taxable 9,321 7,166 3,053 137 4,546

Municipal -830 -696 -110 126 769

Commodity 167 1,120 547 -332 938

Total 7,279 11,705 -1,939 -13,057 -7,363

Reporting By Jennifer Ablan; Editing by Dan Grebler

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