Bond funds hit by biggest monthly withdrawals in almost 3 years
Investors take out $36bn during October with fixed-income ETFs succumbing to turbulence
Nicole Bullock, Robin Wigglesworth and Joe Rennison in New York
The deepening markets reversal has led to the first monthly outflow from bond ETFs in two years, for a net redemption of $1.57bn in October © Dreamstime
Investors withdrew $36bn from bond funds in October, the biggest monthly net redemption in almost three years, as even exchange traded fixed-income funds succumbed to the global market turbulence.
Bond ETFs have become increasingly popular with investors on the lookout for cheap, simple ways to get exposure to fixed-income markets. But the deepening bond reversal led to the first monthly outflow in two years, for a net redemption of $1.57bn, according to preliminary numbers from EPFR Global.
All told, bond funds around the world saw $36bn pulled out in the month to Wednesday, the biggest withdrawal since December 2015, the preliminary figures show. Of note is that the outflows follow a stampede of investors into bond investments. Last year these funds took in more than $600bn.
“Investors were de-risking any sort of credit position,” said Matthew Bartolini, head of Americas research for State Street SPDR exchange traded funds. “You had concerns over peak earnings growth and you had ongoing geopolitical flash points whether it was the Italian budget reforms or trade war rhetoric that continues to percolate.”
Bond ETFs were hard hit by the $2.5bn withdrawal from junk bond ETFs.
Interest rate increases from the Federal Reserve also mean higher borrowing costs for US companies and represent a potential threat for corporate margins.
Within the broad bond fund category, US bond funds suffered net outflows of more than $13bn, while political and economic uncertainty helped to drive $9bn from Europe-focused funds. Investors also withdrew $3.8bn from emerging market debt funds.
Corporate debt was initially fairly resilient when market turbulence began in early October, but the sell-off has gradually gathered pace, sending bond prices sliding and yields climbing higher.
“It’s a reasonable action to take in this market. It has been completely the other direction for a very long time,” said Kathleen Gaffney at Eaton Vance. “Is it over because you are not getting compensated? Or are investors maybe thinking getting into cash right now is safer than reaching for yield? That seems a rational logic.”
The Bloomberg-Barclays Global Aggregate index of international bonds is now down 3.4 per cent for the year — on track for its third-worst year since its inception in 1990 — while US junk bonds lost 1.6 per cent in October, its worst month since January 2016.
LQD, a $31bn bond ETF that tracks the US corporate debt market, fell for a fourth day running on Thursday to trade at its lowest level since the 2013 “taper tantrum” that followed the Fed’s announcement of plans to trim its quantitative easing programme.
The fixed-income ETF has now lost almost 8 per cent of its value this year, and is on track for its worst year since its inception in 2002.
The rolling global market rout of October sent ETF trading volumes spiralling higher, with just US ETF volumes averaging more than $11bn a day last month, according to BlackRock.
Passive bond funds also had record volumes, with junk bond ETFs averaging $3.2bn of trades a day, and investment-grade bond ETFs averaging $1.7bn a day.
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