Record Inflows into Sterling Bond Funds as Investors Hold onto Central Bank’s Coattails

Inflows into investment grade (IG) bond funds reached their highest peak ever in the preceding week as investors followed the lead set by the Bank of England following the announcement of its intention to buy £60bn worth of government bonds as part of its asset purchase scheme.

Bond fund managers will be thanking Mr Carney collectively for increasing quantitative easing (QE) by 70bn at the August Bank of England (BOE) rate meeting.

The BOE’s decision to purchase more gilts and IG corporate debt in order to push down borrowing costs and lend liquidity to banks, led to a rise in demand for, and therefore the price of gilts and triggered a similar, copycat bout of bond buying by investors.

The result was the highest inflows into Sterling IG Bond funds ever recorded in a week, according to data released in a recent client briefing note by Bank of America Merril Lynch (BofAML).

IG funds are those comprised of high grade sovereign debt and corporate fixed income assets, like those favoured by central banks’ QE bond-buying programmes.  

“In a world dominated by central banks' QE programs, BoE has been the latest to join - or re-join - the party. Last week's inflows into sterling IG funds were the largest ever,” say BofAML.

It is not just the BOE which has caused the rapid rise in inflows, IG funds have benefited from a total of 30bn in inflows since the ECB announced their bond-buying programme too.

Last week was the 22nd consecutive week of inflows into High Grade Funds.

The recent rise in demand for fashionable Canadian bonds, which has seen record inflows due to investors being attracted to commodity currency, high yielding, stable, AAA debt, helped support the Canadian dollar and is expected to lead to a reduction in the Current Account deficit.

The similar rise of inflows into sterling based IG bond funds could also have a similar supporting effect on the pound, and may also help offset the expected hole in the Current Account, caused a dramatic fall in inbound investment due to Brexit uncertainty.  

These increased IG flows, therefore, could have a positive offsetting effect on the pound, in contrast to the expected weakness.

High yield funds come up for air. Equities: ‘Au Revoir’

High yield Funds, meanwhile, pulled out of negative territory with a marginal inflow especially in Europe; those in the US in contrast suffered a net negative flow.

Equity funds, especially those in Europe, lost money on souring risk appetite.

“Outflows from European equity funds continued for a 27th consecutive week. The intensity of the outflows - which peaked in mid-July - has been slowing down over the past four weeks,” say BofAML.

Since February’s risk asset lows equity funds have lost an estimated 82bn dollars in assets.

Emerging Market Bond Funds have gained steadily since February, with inflows rising by 28bn since then.

“EM global debt funds recorded a sixth week of inflows, but the summer season is taking its toll on the flow strength. Commodity funds recorded their 16th consecutive inflow, the 31st so far this year, and the highest in four weeks,” reads the note.

A flow analysis based on duration showed both short, medium and long-term bond funds all saw gains of varying durations.