The July issue of Crane Data's Bond Fund Intelligence, which was sent out to subscribers Monday, features the lead story, "Bond Fund Inflows Continue at Record Pace in H1'17," which reviews the heavy inflows into bond funds in the first half of 2017. BFI also includes the "profile" article, "Pros & Cons of Ultra-Short BFs by Crane, Pope & Olsen," which quotes from a recent Money Fund Symposium session on ultra-short bond funds. In addition, we recap the latest Bond Fund News, which includes briefs on higher yields in June, inflows, active bond funds, and corporate bonds. BFI also includes our Crane BFI Indexes, averages and summaries of major bond fund categories. We excerpt from the July issue below. (Contact us if you'd like to see a copy of our latest Bond Fund Intelligence and BFI XLS data spreadsheet, and watch for our latest Bond Fund Portfolio Holdings "beta" next week.)

Our lead Bond Fund Intelligence story says, "Inflows into bond funds in the first half of 2017 continue to run at a record pace. Based on the Investment Company Institute's numbers, bond funds (and ETFs) have attracted over $203 billion YTD. For the first six months of 2017, bond funds and bond ETFs have averaged inflows of over $33.9 billion, almost double the pace of last year's inflows. Bonds have yet to show a single month of outflows in 2017."

It explains, "ICI's monthly 'Trends in Mutual Fund Investing' shows bond fund assets rising by $51.3 billion to $3.868 trillion in May. Year-to-date, bond fund assets have risen by $174 billion (through 5/31), and assets likely continued higher in June. During 2016, bond fund assets rose by $235.9 billion, or 6.9%."

The last monthly ICI release says, "Bond funds had an inflow of $25.53 billion in May, compared with an inflow of $15.00 billion in April. Taxable bond funds had an inflow of $23.41 billion in May, versus an inflow of $12.55 billion in April. Municipal bond funds had an inflow of $2.13 billion in May, compared with an inflow of $2.45 billion in April."

The update continues, "ICI's latest weekly 'Combined Estimated Long-Term Fund Flows and ETF Net Issuance,' which show data as of the week ended July 5, says, '`Bond funds had estimated inflows of $5.82 billion for the week, compared to estimated inflows of $5.40 billion during the previous week. Taxable bond funds saw estimated inflows of $6.07 billion, and municipal bond funds had estimated outflows of $250 million.'"

Our latest profile says, "Last month at Crane Data's Money Fund Symposium conference in Atlanta, a session entitled, 'Pros & Cons of Ultra-Short Bond Funds' featured our Peter Crane, along with Fidelity's Kerry Pope and Northern Trust's Morten Olsen. The three discuss the growing use of ultra-short bond funds by institutional cash investors. We quote from this session below."

Crane explains, "Ultra-short bond funds have been one of the great hopes [in the near 'cash' space.... The good news about the space is that after several years of a lot of launches and a lot of pushing from providers, there is a [now] awareness." He continues, "Big corporate investors who've been targeted now know about ultra-short bond funds [as an] alternative to prime money funds, and as an alternative to get more yield. The other good news is, they're starting to gain critical mass."

Pope tells us, "We had the benefits of the 2007-2008 enhanced cash product [experience and problems] when we were creating these new ultra-short products. They're different for a couple of reasons. Pope continues, "One is that we're focused on ... volatility, and [not] simply providing a higher rate return rather than a money market fund. They're not holding a tremendous amount of structured product mortgage securities in these types of products."

He continues, "The client base that we're selling to is: 1) a more stable client base, primarily because we've explained to people the use of this type of a product is not for operating cash, it's for strategic liquidity, liquidity that has some level of dormancy around it.... As opposed to back in the day, when they were selling enhanced cash products, those products were designed to compete directly with money market funds."

Pope adds, "They were sold as operating cash equivalents. They were highly rated [but] most of the product ... was structured product.... We all know what happens in times of stress with structured products, there's no liquidity.... Before they were certainly mis-marketed, mis-sold and poorly managed."

He continues, "So part of the lessons learned is that what we're now selling are basically products that you used to buy as money market products. These are basically the old 2a-7 money market products, but because of rate reform, money market funds have become shorter in duration and more conservative. We used to manage to a $1.00 NAV very protectively back when we had 90 day weighted average maturities or 120 day weighted average maturities in the money market space. What we're really looking to recreate is that conservative profile."

Our Bond Fund News brief on "Yields Higher; Returns Mixed in June" eplains, "Yields rose across all of the Crane BFI Indexes last month, but returns were lower for several major sectors. The BFI Total Index averaged a 1-month return of -0.03% and gained 2.01% over 12 months. The BFI 100 had a return of 0.00% in June and rose 2.65% over 1 year. The BFI Conservative Ultra-Short Index returned 0.10% and was up 1.14% over 1-year; the BFI Ultra-Short Index had a 1-month return of 0.11% and 1.49% for 12 mos. Our BFI Short-Term Index returned 0.00% and 1.60% for the month and past year. The BFI High Yield Index increased 0.01% in June and is up 9.63% over 1 year."

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