Both developed market government and corporate bond fund flows turned negative in May, seeing combined net outflows of €3.2bn. These are the biggest outflows since Morningstar started tracking fund flows in January 2012. Perhaps not coincidentally, eurozone government bonds suffered their steepest aggregate weekly losses since 2009 in May.
Short it all
In a stark contrast to the large outflows from long-only bond funds, long/short fixed income funds enjoyed a strong rise in inflows, with investors pouring in €1.7bn in May. This suggests they have been swapping part of their long/only bonds for long/short funds, which are supposed to weather a bear market much better as they can trade in derivatives.
Tim Peeters, head of securities portfolios for the Belgian multi-family office, is one of the investors who have been doing exactly this. “Some 60% of my total fixed income allocation is now invested in absolute return funds,” he told Expert Investor Europe recently. And he is not planning to get back into eurozone government bonds anytime soon. “I demand a yield of at least 2% in order to get back in,” he says.
Down the curve
But not all long/only bonds are being sold off. Interestingly, it’s only the long part of the curve which has taken a hit. Short-duration investment grade bonds were still registering net inflows over the month, as investors are reducing their duration anticipating higher market volatility.
“We have reduced our duration from 5.2 to 3,” says Jaap Bouma from the Dutch wealth management company Optimix. These tactical moves have been bearing fruit, as short-durations bonds have held up much better over the past few months (see graph above).