Bond funds revel in white-hot year for fixed income
Investors have poured money into fixed income funds at a record pace this year, fuelling a blowout bond market rally that has taken veteran traders by surprise and sent borrowing costs back to their lowest levels on record.
The latest data from EPFR Global, which tracks flows in and out of mutual funds and exchange traded funds across the world, show that money has been added to fixed-income funds for 49 straight weeks.
That stretch has added $468bn in new assets to bond funds, the largest uninterrupted haul in records going back to 2001 — eclipsing the $275bn over 54 weeks to December 2012, and the $250bn over 60 weeks ending in May 2010. Assets in bond funds now total $5.8tn, from $4.9tn at the start of the year, reflecting sharp rises in prices along with net inflows.
Central banks across the world juiced the rally by loosening monetary policy, but fund purchases have continued even since October when the US Federal Reserve said it was finished with its recent run of cuts in interest rates.
“It’s been a surprisingly extraordinary year for the fixed income markets,” said Bob Michele, global head of fixed income for JPMorgan Asset Management. “Overwhelming” monetary easing sent investors “scrambling to put money into fixed income before rates came down further”, he said.
Jeffrey Gundlach, chief executive of bond fund manager DoubleLine Capital, said investors were responding to a “big shift” from a Federal Reserve that appears no longer to fear inflation. Chairman Jay Powell has signalled that consumer prices would have to rise significantly and stay high before he would raise rates again.
“It’s almost poetic that Paul Volcker passed away [last week],” Mr Gundlach told the Financial Times, referring to the former Fed chairman who vanquished 1970s-era inflation with high interest rates.
Fears over a slowing global economy prompted central banks around the world to cut rates 66 times this year, according to JPMorgan data.
The demand for bonds sent the yield on the Bloomberg Barclays Multiverse, one of the widest measures of the bond market, tracking $59tn in assets, down to 1.4 per cent in September, matching its lowest level last reached three years ago. Investors in the Multiverse have enjoyed returns of 6.4 per cent so far this year, on course for the second-best annual result in a decade.
Scott Mather, chief investment officer of US core strategies at Pimco, the $1.9tn bond fund manager, said 2019 was “unique” because bond markets have done well across the board — from developed to emerging market government debt and the safest to the riskiest corporate bonds.
The difference in yields between US junk bonds and risk-free government debt has tightened by 1.6 percentage points to 3.7 per cent since the start of the year, according to an ICE Bank of America Merrill Lynch index, indicating strong interest even in risky bonds.
The bond buying also increased the amount of negatively yielding debt around the world to a record $17tn in August. The total stood at $11.5tn at the end of last week.
Borrowers have taken advantage of investor demand to raise money on progressively better terms. According to S&P Global Ratings, global bond issuance totalled $5.9tn in the year to October, 13.5 per cent higher than at the same point last year.
The rally has also challenged the traditional role of bonds in a portfolio alongside equities. Investors typically buy bonds for stable yields and equities for price appreciation. But bond prices have surged like stocks, leaving investors who are seeking consistent streams of income to consider stocks with apparently solid dividends.