Investors have flocked to fixed income mutual funds at the fastest rate since the financial crisis, piling in almost $500bn in the first half of 2019 during trade war tensions, recessionary fears and market volatility.

About $487bn flowed into fixed income funds this year, up from $148bn in the first half of 2018, according to figures from Morningstar, the data provider. It is the highest level of first-half net inflows into bond mutual funds for at least a decade.

Assets under management in bond funds have doubled since 2010 to a record $9.4tn at the end of June 2019, as the spread of negative rates across fixed income markets drove up the value of the bond market globally.

Robert Tipp, head of global bonds for PGIM Fixed Income, the US asset manager, said investors were grappling with increased volatility in equity markets at a time when levels of savings are high.

“With ageing demographics and burgeoning savings, bond markets are attractive. Trade tensions, very muted growth globally and high volatility have also pushed investors to bonds,” he said. “The bottom line for investors is they are looking for income and are concerned about risk.”

Bond funds have emerged as a big winner in the shift in central bank policy this year, with investors flocking back to the products in anticipation of interest rate cuts and further monetary easing from central banks globally.

The US Federal Reserve cut its main interest rate by 25 basis point in July, the first reduction since the financial crisis. The European Central Bank’s rate-setters have also said the institution should be “ready and prepared” to unleash new stimulus.

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“This year we have seen global central banks turn from tightening to easing. This is good for fixed income in general as it pushes yields lower and boosts returns,” said Mark Holman, chief executive of TwentyFour Asset Management, a UK fixed income specialist.

He added that the equity market sell-off at the end of 2018 had reminded investors “to hold more fixed-income assets”.

An influential survey found last month that institutional investors are buckling up for a global economic downturn. The UK economy contracted in the second quarter for the first time in almost seven years, while industrial production in Germany fell more than expected in June, compounding fears the country could be heading for a recession.

The long-running trade dispute between the US and China has also spooked investors. US president Donald Trump escalated tensions with China this month, triggering a sell-off in equities and a flight to government debt.

Evangelia Gkeka, senior manager research analyst for fixed income at Morningstar, said recent market volatility “stemming from concerns over the US-China trade conflict combined with potential quantitative easing measures from the Fed and the ECB led to safe heaven flows into core government bonds”.

Andrew Mulliner, global bonds portfolio manager at Janus Henderson Investors, the $360bn fund house, said there was much talk in recent years that equities would return to favour, but investors continued to be attracted to the security of bonds.

“The story of the last 10 years has been a consistent demand for bonds over equities,” he added.

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Equity mutual funds had inflows of $354bn during 2018, more than three times the $113bn that flowed into fixed income funds. But this year, equity funds have suffered outflows of $26.5bn, according to data from Morningstar.

Joern Wasmund, global head of fixed income at DWS Group, the $719bn asset management subsidiary of Deutsche Bank, said he is not expecting a change in demand for fixed income in the near future.

“The expectation of a second round of asset purchases by the ECB only reinforces this trend. Investment grade credit flows should be a beneficiary,” he said.

But he warned that the negative or ultra-low yield levels were pushing some investors into riskier asset classes.

“Vigilance is necessary. At the same time, the accommodative monetary policies mitigate the risk of a sharp sell-off in investment grade fixed-income assets and should keep default rates, absent a trade war or supply price shock, at moderate levels,” he said.

Via Financial Times