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Investors have poured record sums into global bond funds this year as they bet on a shift to easier monetary policy by major banks.
Bond funds have attracted more than $600bn in inflows so far this year, according to data provider EPFR, up from a previous high of around $500bn by 2021, as investors see slowing inflation as a turning point for global fixed income. .
This was “a year where investors bet big on a big change in monetary policy” that has historically supported bond returns, said Matthias Scheiber, senior portfolio manager at asset manager Allspring.
The combination of slow growth and slow inflation encouraged investors to plow into bonds at “higher” yields, he added.
The record move came despite a tough year for bonds, which rallied over the summer before giving up their gains at the end of the year amid growing concerns that the pace of global deflation will be slower than previously expected.
Bloomberg's global bond index – a broad measure of sovereign and corporate debt – rose in the third quarter of the year but has fallen in the past three months, leaving it 1.7 percent this year.
The Federal Reserve this week cut rates by a quarter of a percentage point, its third cut in a row. But signs that inflation has proved more stubborn than expected mean the central bank has signaled a slower pace of tapering next year, sending US government bond prices to lows and the dollar to two-year highs.
Despite record inflows into bond funds over the course of the year, investors withdrew $6bn in the week to December 18, the biggest weekly outflow in almost two years, according to EPFR data.
The 10-year US Treasury yield – the benchmark for global fixed income markets – is currently back at 4.5 percent, having started the year below 4 percent. Yields rise as prices fall.
Investors piling into bond funds are being driven by “pervasive fears about a (US) recession combined with inflation,” said Shaniel Ramjee, head of multi-assets at Pictet Asset Management.
“While disinflation occurred, economic recession did not occur,” he said, adding that for many investors, the initial high yields on government bonds may not be enough to cover the losses in prices experienced during the year.
Credit markets have become stronger, with credit spreads over corporate bonds reaching them the lower one for decades in the US and Europe. That led to an increase in bond issuance as companies sought to take advantage of the easy financial conditions.
Risk-averse investors have been drawn to fixed-income products such as equities, particularly in the US, which have increased significantly, according to James Athey, bond portfolio manager at Marlborough.
“US equities are absorbing moves like there's no tomorrow, but as interest rates have normalized investors have started to return to traditionally safe bets,” he said.
“Inflation has come down sharply everywhere, growth has been very soft everywhere. . . and it is a friendlier place to be a bond investor,” added Athe.