The December issue of our Bond Fund Intelligence, which was sent to subscribers Monday morning, features the lead story, "Bond Funds Break $5.0 Trillion & Bond ETFs Hit $1.0 Trillion," which looks at the latest record levels of bond funds and bond ETFs, and "Fitch's Sewell, Northern's Farrell on S-T European BFs," the two discuss low yields, credit quality and liquidity. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund yields fell and returns jumped in November. 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 Bond Funds Break $5.0 Trillion piece reads, "Bond funds continued to see strong inflows in November, with a brief minor dip at month-end Oct. ICI's 'Combined Estimated Long-Term Fund Flows and ETF Net Issuance,' says, 'Bond funds had estimated inflows of $22.57 billion for the week, compared to estimated inflows of $13.93 billion during the previous week [and inflows of $17.1 billion the week before that]. Taxable bond funds saw estimated inflows of $20.76 billion, and municipal bond funds had estimated inflows of $1.81 billion.' Over the past 5 weeks, bond funds and ETFs have seen inflows of $68.9 billion."

It continues, "Their latest 'Trends in Mutual Fund Investing – October 2020' shows bond fund assets rose $34.0 billion, 0.7%, to $5.002 trillion in October, after rising $30.2 billion in September. Over the 12 months through 10/31/20, bond fund assets have increased by $386.2B, or 8.4%. The number of funds rose by one in October to 2,129, down 28 over a year."

Our European Bond Funds article explains, "Fitch Ratings recently hosted a webinar entitled, 'European Short-Term Bond Funds – Risks and Perspective in the Current Low Yield Environment,' which features comments from Fitch's Alastair Sewell and Northern Trust AM's Dan Farrell. The two discussed the short-term European bond fund market, the 'current low yield environment' and 'funds' credit quality and liquidity.' We quote some of the highlights below."

Sewell explains, "With rates where they are, with pressures on yields, it seems very natural that many investors would be considering some kind of allocation to short or ultra short duration bond funds ... compared with ... a short term money market fund. Implicit in this is an increase in risk appetite. These ultra short bond funds will typically take more risk than a short term money market fund, so there is an implicit acceptance of increased risk here. Which perhaps points to a stabilization in the wider macro landscape and the wider market dynamics."

Farrell agrees, "It makes sense with the low interest rate environment [and] corresponds to what we're seeing within our own business. We've seen a lot more interest and a lot more flow into our ultra short strategies since May, and from a variety of different investors. There seems to be a growing acceptance that central banks will keep rates at these low levels for the foreseeable future.... So, I think the long interest rate environment, alongside the potential increase in regulations on money funds resulting in potential further yield compression, will no doubt continue this trend going forward."

Our Bond Fund News includes the brief, "Returns Jump, Yields Plunge in Nov." It says, "Bond fund yields were lower while returns surged last month. Our BFI Total Index returned 1.41% over 1-month and 4.88% over 12 months. The BFI 100 rose 1.42% in Nov. and rose 5.82% over 1 year. Our BFI Conservative Ultra-Short Index returned 0.07% over 1-mo and 1.49% over 1-yr; Ultra-Shorts averaged 0.29% in Nov. and 1.80% over 12 mos. Short-Term returned 0.68% and 3.70%, and Intm-Term jumped 1.32% last month and 6.92% over 1-year. BFI's Long-Term Index surged 2.01% in Nov. and 9.16% for the year. Our High Yield Index skyrocketed 3.10% last month but is up 4.53% over 1-year."

In another News brief, we quote Morningstar's, "With Yields So Low, Where Do You Go?" They tell us, 'The collapse of yields across the fixed-income market has meant that core-bond fund managers investing in U.S. Treasuries, agency mortgages, and corporate credit have fewer tools at their disposal when seeking to generate a high level of income. Looking at the median SEC yield of a group of distinct intermediate core bond Morningstar Category strategies illustrates this fact vividly.'"

In a third News update, Pensions & Investments writes, "Derivatives a big part of suddenly popular bond ETFs." They explain, "From index futures and ETF options to total return swaps, many of the largest and most liquid equity exchange-traded funds are supported by a swath of derivatives and a ready market for borrowing ETF shares. These features allow market makers to hedge risk with precision, investors to buy or sell protection, and speculators to leverage their exposures. Now, a similar ecosystem for fixed-income ETFs is rapidly emerging, thanks to a flood of assets and an overt endorsement of ETFs by their inclusion in the Federal Reserve's Secondary Market Corporate Credit Facility."

Finally, BFI features the sidebar, "DoubleLine's Sherman Talks," which tells us, "SSGA hosted a webinar, 'Talking Performance with Jeffrey Sherman,' which featured the DoubleLine Deputy Chief Investment Officer discussing current events' impact on the bond market and 'performance drivers and detractors.'"

Sherman explains, "Obviously, we have the most exposure to U.S. Treasuries just given that we're trying to run an intermediate term bond fund here.... The next highest would be in investor grade corporate bonds, although we are significantly underweight ... as we have been for many years.... If you take the comparable duration of the Treasury market, you just really don't get paid a lot for that incremental risk."

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