By Harry Robertson
LONDON- Investors poured $19 billion into bond funds in the week to Wednesday, the biggest inflow since February 2021, as they locked in high yields, Bank of America said in a research note on Friday.
Cash funds received $51.9 billion of inflows, BofA said, citing numbers from financial data EPFR, the largest inflow in two months.
The yields available on fixed income assets have soared as central banks have hiked interest rates to tackle inflation, drawing investors to bonds and cash-like money market funds.
BofA analysts said in the research note that investors were “locking in ‘peak yields’” ahead of expected rate cuts later this year.
After some signs of progress on inflation and a slowing in growth, financial markets expect the US Federal Reserve to cut borrowing costs by around 0.5 percentage points this year.
BofA said equity funds received their 11th straight week of inflows, at $8.1 billion, in the longest streak since Dec. 2021.
It said US large-cap equities – the largest companies in the American market – received their biggest inflow in 16 weeks at $16.6 billion.
Meanwhile, a recalibration of how the US presidential election plays out is causing bond investors to bet yields stay higher for longer as November approaches.
Yields have risen sharply after President Joe Biden’s stumbling performance against Republican rival Donald Trump in the first presidential debate last month, which increased speculation about a second Trump win when voters go to the polls on Nov. 5. The benchmark 10-year yield rose about six points to 4.34 percent following the debate.
Some investors are betting on higher inflation under Trump because of trade and economic policies such as higher tariffs on imports, and profligate government spending along with lower tax revenues, which would boost fiscal deficits and US debt levels. Trump’s team has said his pro-growth policies would bring down interest rates and shrink deficits.
Republican National Committee spokesperson Anna Kelly said in a statement that the market reaction to Trump’s “debate victory reflected the anticipation of the strong-growth, low-inflation reality that President Trump will deliver once again.”
Some have said a reckoning on US debt will eventually catch up with the country and market.
“The lens (is) really starting to turn to the fiscal and the debt dynamics,” said Mary-Therese Barton, fixed income chief investment officer at Pictet Asset Management. “(The) rate-cutting cycle is perhaps shallower than expected with a focus more on the longer end.”
Those concerns around widening fiscal deficits and the rising government debt burden threaten to limit any nascent rally in bonds, expected as the Federal Reserve gets closer to cutting rates after an aggressive hiking cycle to tame inflation.
“We feel the probability of (a) Trump election victory has risen,” John Velis, Americas macro strategist at BNY, wrote in a note. “Our faith in lower yields going forward has been eroded and we wouldn’t be surprised to see a continuation of the very recent moves higher in yields.”
Shorter-dated Treasuries, more directly linked to changes in monetary policy, could still rally in case of rate cuts, but even for bond bulls the outlook for longer-dated Treasuries has become cloudier. Longer dated debt tends to reflect expectations for economic growth, inflation and the fiscal outlook. -Reuters
