While high-yield bond net flows once again turned negative after three months of bumper inflows, their investment-grade counterparts saw investors return in great numbers: the asset class saw net inflows of €3.4bn, the highest figure since summer last year.
In a sign that investors expect rates to remain ‘lower for longer’, flows into European corporate bond funds were concentrated in short-term funds. Government bonds saw a seventh consecutive month of net outflows, the longest series of monthly redemptions since 2011.
Risk-on or risk-off?
One should be careful to interpret the move into investment-grade corporate bonds as a risk-off trade. It should rather be seen in the light of the ongoing hunt for yield. Investors sold off (USD) high-yield bonds, while diverting much of the proceeds to actively managed US corporate bond funds, responding to high-yield credit spreads having reached multi-year lows.
A sizeable amount of money (€1.3bn) was actually invested in sterling-denominated bonds. The bulk of this is likely to have come from UK investors as continental European investors tend to not invest in this asset class.
Convertible bond funds have also beginning to see net inflows, something that typically only happens when investors see clear upside in equity markets. In both February and March, net inflows exceeded the €100m mark. This followed a 14-month run of net outflows.