The September issue of our Bond Fund Intelligence, which was sent out to subscribers Monday morning, features the lead story, "Ultra-Short Gets Even Hotter; A Look at Negative Yields," which looks at the strong flows into the shortest segment of the bond fund marketplace and "Regulators, ICI Debate Run Risk in Bond Funds (Again)," which reviews the discussion over liquidity concerns and run risk in BFs. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show bond fund yields plummeted and returns skyrocketed in August. We excerpt from the new issue below. (Contact us if you'd like to see our Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings data.)
Our lead "Ultra-Short" article says, "While falling rates may eventually diminish their glow, Ultra-Short Bond Funds, and Conservative Ultra-Short Bond Funds, continue to be among the hottest sectors of the bond fund marketplace. Year-to-date, the two combined categories have increased by $17.3 billion (to $159.3 billion), while over the past 12 months they've increased by $27.7 billion, or 21.1%. This makes them the fastest-growing segment and compares with growth of 10.1% for Bond Funds overall."
It continues, "Refinitiv's Lipper said on Friday, in a brief, 'Ultra-Short Obligation Funds Continue Their Hot Streak,' that, 'Lipper's Ultra-Short Obligation Funds peer group (including both mutual funds and ETFs) took in $2.1 billion in net new money for the fund-flows trading week ended Wednesday, September 11. This was the group's second-largest weekly net inflow ever (trailing only the $2.5 billion positive net flow for the November 21, 2018 fund-flows week) and its eleventh consecutive weekly net intake."
Lipper's brief adds, "Investor infatuation with this peer group extends way beyond the current quarter as ultra-short obligation funds have experienced only nine weekly net outflows since the start of 2017. This time period spans 141 weeks and equates to a 93.6% success rate in respect to achieving weekly net inflows. As could be expected, this run has led to the group's two best annual net inflows with $59.7 billion and $25.1 billion, respectively, for 2018 and 2017. The group has grown its coffers by $20.6 billion for the year to date and will surpass 2017 for the second largest annual net inflow if it continues at this rate."
Our "Regulators" piece explains, "Several studies and articles have been published recently discussing liquidity buffers and potential for a run in bond funds. Last month, the Federal Reserve published a study, 'Liquidity Transformation Risk in U.S. Bank Loan and High-Yield Mutual Funds,' and European regulator ESMA published a release and study on stress testing and liquidity. (See: 'Esma Publishes Stress Simulation Framework for Investment Funds.')"
The Financial Times covers the news in the piece, "European watchdog warns on bond fund liquidity risk." It tell us, "The European Securities and Markets Authority issued a warning ... after conducting an analysis of how the investment fund sector would cope with severe market shocks, such as the collapse in 2008 of Lehman Brothers, the US investment bank. Esma found that although most funds would have sufficient liquid assets to meet investors' redemption requests in the event of such 'extreme but plausible' shocks, there were 'pockets of vulnerabilities,' most notably among high-yield bond funds."
The FT explains, "Regulators have stepped up their scrutiny of fund liquidity after a number of high profile cases where problems have come to light, including H2O, a European asset manager owned by Natixis that loaded up on illiquid debt, and GAM, which suspended withdrawals from a range of bond funds run by the Swiss asset manager with large holdings of esoteric, illiquid assets."
Our Bond Fund News includes the brief "Yields Plummet, Returns Surge in August, which says, "Bond fund yields plunged while returns skyrocketed last month. Our BFI Total Index returned 1.16% over 1-month and 6.75% over 12 months. The BFI 100 returned 1.37% in August and 7.58% over 1 year. Our BFI Conservative Ultra-Short Index returned 0.25% over 1-mo and 2.69% over 1-yr; the BFI Ultra-Short Index averaged 0.23% in August and 2.89% over 12 mos. BFI Short-Term returned 0.65% and 4.68%, and BFI Intm-Term returned 1.85% and 8.53%. BFI's Long-Term Index returned 3.10% in August and 11.63% for 1-year; our High Yield Index returned 0.26% in August and 5.29% over 1-year."
Another News brief quotes Investment News', "Falling rates expose duration risk in bond funds." They tell us, "Falling interest rates across the global fixed-income market have proven to be a boon for certain bond funds that are pushing the limits on interest-rate risk. For example, by delivering promised longer-duration exposure, both the Pimco Extended Duration Fund (PEDPX) and the Vanguard Extended Duration Treasury Index Fund (VEDIX) are up more than 32% this year. Virtually all the top-performing taxable bond funds tracked by Morningstar have gotten there by leaning on duration, which is a measure of a bond's sensitivity to interest rates that can cut both ways in a hurry."
A third News update cites a WSJ piece, "Some Investors Are Betting the Flight to Bonds Is Overdone." This article says, "The 2019 bond rally has reached epic proportions this summer. A hearty pack of skeptical investors is betting it is way overdone. Sentiment in debt markets has rarely been more euphoric. Yields on German government bonds have slumped to all-time lows, pushing prices higher and driving the stock of global negative-yielding debt to $15 trillion. Yields on 10-year U.S. Treasurys this week fell below two-year yields for the first time since 2007, a pattern known as inversion that many investors view as a harbinger of economic recession."
Finally, a sidebar entitled quotes Morningstar in an article titled, "Intermediate Core-Plus Bond Funds Get Adventurous." It says, "Times are relatively tough for fixed-income managers. Geopolitical uncertainty, ultralow or negative yields around the world, and the decade-long recovery have resulted in rich valuations in several areas, including corporate credit. As a result, some managers in the intermediate core bond and intermediate core-plus bond Morningstar Categories have relied more heavily on securitized debt over investment-grade and/or high-yield corporates because they believe its various components offer some combination of favorable risk-adjusted returns, good diversification, and ample liquidity."
Morningstar adds, "The plain-vanilla side of securitized holdings is nothing new. Core bond funds have long invested in agency mortgage-backed securities. The Bloomberg Barclays U.S. Aggregate Bond Index's stake in agency mortgages is just below 28%. Here, we highlight how a few managers have emphasized this space in recent years."
