Global bond funds are seeing their largest outflows in two decades

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By Patturaja Murugaboopathy and Gaurav Dogra

(Reuters) – Global bond funds saw their biggest outflows in two decades in the first three quarters of this year as hefty rate hikes by central banks to tame inflation sparked recession fears.

According to Refinitiv Lipper, global fixed income funds experienced a cumulative outflow of $175.5 billion in the first nine months of this year, the first net sales in that period since 2002.

Money flows in global bond funds https://fingfx.thomsonreuters.com/gfx/mkt/movanxwnwpa/Money%20flows%20in%20global%20bond%20funds.jpg

The data showed that global bond fund net asset values ​​fell by an average of 10.2%, the worst drop since at least 1990.

Global bond fund performance https://fingfx.thomsonreuters.com/gfx/mkt/myvmndbnkpr/Global%20bond%20funds’%20performance.jpg

Governments and corporations have borrowed heavily in recent years by taking advantage of ultra-low interest rates and are now staring at larger interest liabilities as yields rise.

“The combination of high levels of debt and a rise in interest rates has reduced investor confidence in the government’s ability to repay debt, leading to the massive outflows we’re seeing,” said Jacob Sansbury, CEO of Pluto Investing.

He added that bond fund outflows could continue into 2023 as interest rate cuts and reduced debt burdens are unlikely.

Emerging market bonds faced outflows of about $80 billion in the first three quarters of this year, while US high yield and inflation-linked bonds posted net sales of $65.81 billion and $16.44 billion, respectively.

iShares UK Gilts All Stocks Index (UK) D Acc saw outflows of $6.67 billion last quarter, while the ILF GBP Liquidity Plus Class 2 and Vanguard UK Short Term Investment Grade Bond Index GBP Acc fund saw outflows of of $2.16 billion and $993 million, respectively.

Biggest cash outflow from global bond funds in third

Quarter https://fingfx.thomsonreuters.com/gfx/mkt/zdvxolqoapx/Biggest%20money%20outflow%20from%20global%20bond%20funds%20in%20the%20third%20quarter.jpg

BONDS ATTRACTIVE NOW

However, some fund managers said bonds looked attractive after this year’s slump.

The ICE BoFA US Treasury Index is down 13.5% so far this year, while the Bloomberg Global Aggregate Bond Index is down about 20%.

“The yield cushion is now significantly more protective of investors against negative total returns than it was at the start of the year,” said Jake Remley, portfolio manager at Income Research + Management.

“This almost certainly improves the outlook for bonds through year-end, even if interest rates continue to rise at the pace of the last 9 months.”

US 2-year and 10-year Treasury yields were about 4.12% and 3.68% on Wednesday, respectively, compared to 0.7% and 1.5% at the start of the year.

Likewise, the ICE BofA US High Yield Index, the commonly used benchmark for the junk bond market, returned 9%, compared to 4.3% at the start of the year.

“Some bonds have become the proverbial ‘babies thrown out with the bathwater’ and offer compelling value at these levels,” said Ryan O’Malley, portfolio manager at Sage Advisory Services.

“However, it is important to note that there is likely to be further credit strain in many corners of the bond market and risk management is paramount in these uncertain times.”

(Reporting by Patturaja Murugaboopathy; Editing by Vidya Ranganathan and Mark Potter)

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