The November issue of Crane Data's Bond Fund Intelligence, which was sent out to subscribers Monday, features the lead story, "Bond Funds See Biggest Outflows of '16; ETFs Suffer," which discusses the recent downturn in bond fund flows, and a profile of Scott Weston and Brent Miller, Senior Portfolio Managers of Touchstone Ultra-Short Duration Fixed Income Fund. Also, we recap the latest Bond Fund News, including yield increases in October and more updates on the ultra-short sector. BFI also includes our Crane BFI Indexes, which showed declines in October. We review the latest BFI below, and we also quote from new releases from Fitch Ratings and Moody's.
Our lead Bond Fund Intelligence story says, "Bond funds have seen 2 straight weeks of outflows in November, their first real declines since January 2015. While our October numbers still show inflows and modest asset increases, prices fell and yields jumped last month. But month-to-date in November things have turned ugly."
It tells us, "Bond fund assets currently stand at $3.735 trillion, up $286 billion over the past year and more than double their level of 2008. Bond ETFs total another $427.2 billion, up $94.1 billion, or 28.2%, over a year ago. These spectacular growth rates no doubt indicate a fair amount of 'hot money'."
Our story adds, "ICI's latest "`Combined Estimated Long-Term Fund Flows and ETF Net Issuance" says, "Bond funds had estimated outflows of $4.63 billion for the week, compared to estimated inflows of $3.94 billion during the previous week. Taxable bond funds saw estimated outflows of $4.62 billion, and municipal bond funds had estimated outflows of $6 million."
The BFI "Touchstone Profile" says, "This month, Bond Fund Intelligence interviews Fort Washington Investment Advisors' Scott Weston, MD & Senior PM, and Brent Miller, Asst. VP & Senior PM. Fort Washington, a subsidiary of Western & Southern Financial Group, is the sub-advisor for several Touchstone funds and the Touchstone Ultra-Short Duration Fixed Income Fund, which was started in 1994." (Watch for more excerpts from this story later this month on www.cranedata.com, or contact us if you'd like to see a copy of our latest Bond Fund Intelligence.)
A sidebar entitled, "Wiener on Small Numbers," explains, "The Independent Adviser for Vanguard Investors writes about the "Law of Small Numbers" in its latest issue. The publication says, "I'm going to call this the 'law of small numbers' because, indeed, when yields get tiny, some funny things begin to happen. Take Ultra-Short-Term Bond, one of the newest of Vanguard's bond funds, which I think of as a money market alternative, even though Vanguard says it isn't. The fund's maturity is ultrashort ... and comes in two flavors, the Investor shares, with a $3,000 minimum and a 0.20% expense ratio, and the Admiral shares, for which you need $50,000 [for] a ... 0.12% expense ratio."
A sidebar on FA on Cap Group Warning, says, "Fund Action featured a brief entitled, "Capital Group Warns On High Yield, Unconstrained Bond Funds." It explains, "Investors need to be wary of excessive credit exposure and unconstrained bond funds, Michael Gitlin, chair of the fixed income management committee at Capital Group, said at Charles Schwab's IMPACT 2016 conference. He added investors should also expect yields to remain lower for longer in light of global central bank policies."
In other news, a release entitled, "Fitch: Bank Short-Term Funding Shifts With US Money Fund Reform," tell us, "The substantial shrinking of US prime money market fund assets and the shift to government money funds as a result of US money fund reform has resulted in significant changes in short-term funding dynamics for global banks over the past year, says Fitch Ratings. Funding profiles have shifted in some banks, with reduced commercial paper issuance and increased secured funding from government money funds."
It explains, "Among the larger banking systems, US, Canadian, French and Japanese banks reduced the funding they take from US prime money funds the most (in absolute terms), according to Crane data compiled by Fitch. Each saw gross financial sector exposure from prime money funds fall in excess of USD100 billion. US, Japanese and Canadian banks have significantly increased their borrowing from government money funds to compensate, with each replacing about one-quarter to one-third of the decline in funding from prime money funds. British banks -- which saw about a USD40 billion decline in prime money fund exposure -- replaced about 80% of their reduced prime fund financing with borrowings from government funds."
Fitch adds, "In contrast, other countries' banks that reduced US commercial paper issuance -- including France, Sweden, Norway and Australia -- did not switch to government funds. US commercial paper is not an important funding source for them. Overall, US prime money funds have reduced lending to banks and their affiliates globally by USD775 billion between October 2015 and September 2016, but the banks have replaced about USD151 billion of that, or 20%, with government fund financing."
Another press release, "Moody's: Money funds emerge as winners from Brexit uncertainty," says, "Uncertainty surrounding "Brexit" and the lack of comparable investment alternatives have kept investors in highly liquid money market funds (MMFs), despite the fact that central bank policy has sent yields tumbling, says Moody's Investors Service." Vice President and Senior Credit Officer Vanessa Robert comments, "Investors have very few suitable, equally safe alternative investments in the current uncertain environment. Lower investor confidence and higher risk aversion could continue to cause corporate investments to be postponed, leading to inflows into low-risk, highly liquid assets such as money market funds."
It adds, "Moody's expects euro prime MMFs will be attractive relative to bank deposits at a time when European banks' appetite for deposits has waned owing to Basel III leverage and liquidity rules. Sterling assets will also increase in Q4 given the uncertainty around Brexit. Prime rated euro MMFs rose to their highest level in a year to 69.2 billion, attracting 5.9 billion of inflows in Q3. Sterling prime MMF assets rose to a 12-month high at GBP111.8 billion over the same period, drawing GBP4.6 billion in inflows -- representing a 4.2% increase."
