Net fund flows into both developed market government and corporate bonds were remarkably robust in the final month of last year, possibly because investors in Europe anticipated on the ECB’s QE announcement in January. Net flows into corporate bond funds amounted to €2.4bn, while their government bond equivalents welcomed €2bn in monthly net flows.
The popularity of (supposedly) low-risk bonds funds was only rivalled by another safe investment: multi-strategy absolute return funds, which saw net inflows of €2.3bn for the month. In a sign of bearishness, as both equity and bond markets were in crisis mood in the run-up to Christmas, riskier asset classes (including all equity asset classes) all recorded net outflows.
Risky bonds suffer
High yield bonds suffered most, registering net outflows of €7.3bn, continuing a six-month outflow streak. Emerging market bond fund flows also turned negative, for the first time since February. Local currency bonds unsurprisingly suffered the largest outflows, of close to €1.5bn, as commodity-exporting countries like Brazil and South Africa constitute a relatively large part of the market. But dollar-denominated corporate bonds also saw considerable outflows.
Data we gathered with fund selectors across Europe in December show that appetite for emerging market debt has indeed come down, especially for government bonds, though it is still higher than demand for any other bonds. In September last year, before the collapse of the oil price, close to a third of European fund selectors said they wanted to increase their allocation to the asset class. Now this is down to less than a quarter.