Investment-grade corporate bonds, emerging market local and hard currency bond funds as well as unconstrained bond funds all saw strong net inflows continue from the previous months. High-yield bonds were something of a dissonant, seeing €206m in net outflows in June. Government bonds, however, recovered from a streak of net outflows, seeing almost €0.5bn in net new money.
“Funds in the USD-hedged global flexible-bond category were the main beneficiaries of the rush to bond funds,” said Matias Möttölä, associate director of EMEA manager research at Morningstar.
The PIMCO GIS Income Fund was especially popular in June, amassing net inflows of €4.1bn. It is now Europe’s largest open-end active fund. In total for the month, PIMCO saw inflows of €5.8bn into its Europe-domiciled open-end funds, taking its year-to-date total net inflows to €27bn.
Partly thanks to renewed interest in bond funds, 2014 now seems a very long time ago for the asset manager. In the year of former ‘bond King’ Bill Gross’s shock departure from the company, Pimco suffered record net outflows of €19.7bn.
Benign outlook for credit
But why are investors buying bond funds so enthusiastically, while central banks are expected to tighten monetary policy, leading to a pick-up in bond yields across the board? This topic is worth a separate analysis, but to keep it short and simple it perhaps suffices to say that investors believe central banks will actually not tighten that aggressively in the face of sluggish inflation numbers.
“To us it makes sense for central banks to start policy normalization, with buoyant financial markets and world economic growth likely to move up in the coming years,” said Kommer Trigt, head of global fixed income at Robeco.
“However, lacklustre price pressures and structural problems, such as low productivity growth and high income inequality, suggest that this policy normalization will be very gradual.” Accommodative central bank policy combined with modestly accelerating economic growth yet low inflation should be good for bonds.
While government bond yields should continue to edge higher, their rise will be contained. At the same time, credit spreads will tighten while default rates stay low. This should be a good environment for credit to perform well. Little wonder higher-risk credit funds (in addition to flexible bond funds) are enjoying record inflows this year.