The February issue of our Bond Fund Intelligence, which was sent to subscribers Monday morning, features the lead story, "Bond Funds Hammered in Jan.; Losses Biggest Since March '20," which says bond funds had their second worst month ever last month; and, "Lord Abbet's O'Brien on Short Duration Credit," which quotes from a recent webinar. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund returns fell hard in January while yields jumped. We excerpt from the new issue below. (Contact us if you'd like to see our latest Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings data. We look forward to seeing some of you too at our upcoming Bond Fund Symposium, March 28-29 in Newport Beach, Calif.)
Our "Bond Funds Hammered in Jan." piece reads, "Bond funds suffered their second biggest asset decline and third worst monthly performance ever in January (in the seven years since BFI has been tracking funds). Total bond fund assets fell by $95.0 billion last month to $3.230 trillion (according to Crane Data), the largest decline since March 2020's $280.2 billion plunge. Returns on average fell by 1.52% for the month, the biggest drop since March 2020’s -4.44%."
It continues, "Morningstar discusses the losses in its piece, 'Bond Funds Start 2022 in a Sea of Red.' They comment, 'Lately, there's been virtually no place for bond investors to hide. Every major category of bond funds -- with exception of funds that invest in bank loans -- has started 2022 with losses, and in most cases, extending declines posted last year.'"
Our "profile" piece states, "Lord Abbet recently hosted a webinar entitled, 'Short Duration Credit: A Timely Response to Rate and Inflation Risk.' The description explains, 'With historically low yields on longer-term, government-related securities, coupled with elevated duration risk, investors may want to consider reallocating a portion of their core bond allocations to short duration credit.' In this webinar, Andrew O'Brien, CFA, lead Portfolio Manager for the firm's taxable fixed income strategies joins Joseph Graham, CFA, Investment Strategist, as they examine how short duration credit may potentially provide an attractive investment opportunity in an environment of inflation and interest-rate uncertainty.'"
It continues, "O'Brien comments, 'Today, the topic of inflation and rates [is] on pretty much everybody's mind. We think short duration credit strategies are an attractive solution, so we'll be talking about the markets set up for that, and also how we manage short duration, what makes us special and what we see today in the market.... Let me give you a brief just commercial for Lord Abbet ... we're a private partnership. We have been since our founding in 1929.... We've carved out some very strong niches where we've shown the ability to add value. Short duration is certainly one of those.'"
He says, "I just want to point out where our assets are. Of the $255 billion, $175 billion is in taxable fixed income.... Our ultra-short and short-duration are multi-sector in nature, as are our core and core-plus <b:>`_.... We think we were the first multi-sector manager in fixed income, and what that allowed us to do was build out a very focused teams within a bunch of different areas in fixed-income.... Applying that to short duration, I think, is a big competitive differentiator for us, given that a lot of the short duration universe tends to come from the cash treasury management side of the business. Nothing wrong with that, but we come from the credit side of the business and utilize our credit expertise."
Our first News brief, "Returns Plunge, Yields Jump in Jan.," comments, "Bond fund returns fell sharply and yields jumped last month. Our BFI Total Index plunged 1.52% over 1-month and fell 0.82% over 12 months. The BFI 100 returned -1.63% in Jan. and -0.84% over 1-year. Our BFI Conservative Ultra-Short Index was down 0.12% for 1-month and down 0.15% for 1-year; Ultra-Shorts declined 0.24% and 0.09%, respectively. Short-Term decreased 0.74% and 0.69%, and Intm-Term fell 1.74% in Jan. and fell 1.74% over 1-year. BFI's Long-Term Index fell 2.45% in Jan. and fell 2.35% over 1-year. Our High Yield Index fell 1.81% in Jan. but gained 2.32% over 1-year."
We also cover the "FSOC Statement on Nonbank Financial Intermediation." BFI states, "The Financial Stability Oversight Council met recently and discussed bond funds briefly. Their statement says, 'The market dislocations of March 2020 demonstrated that some NBFIs [nonbank financial institutions] remain vulnerable to acute financial stresses and may amplify or transmit stress in the financial system. In 2021, the Council made it a priority to evaluate and address the risks ... posed by three types of NBFIs: hedge funds, open-end funds, and money market funds (MMFs)."
A third News brief is headlined, "Bloomberg writes, 'Billions Are Flowing to Cash-Like ETFs in 'Hunt' Before Fed Hike.'" They ask, "What's safer than short-duration bonds? Even shorter duration debt. As investors brace for an increasingly aggressive Federal Reserve, money is flooding into cash-like ETFs -- which are seen as ... less vulnerable to interest-rate risk. Traders have been piling into exchange-traded funds mostly focused on ultra-short instruments like Treasury bills, while offloading ETFs tracking longer-dated debt -- even those that are considered short-term bonds.... The $14 billion PIMCO Enhanced Short Maturity Active ETF (ticker MINT) lured inflows of nearly $900 million in the best week since it started trading in 2009, according to data compiled by Bloomberg."
Yet another News brief, "WSJ says, '`Investors Sour on Muni Funds,' writes, "Investors pulled $1.4 billion from municipal bond funds in the week ended last Wednesday, the biggest weekly outflow since the early days of the pandemic, according to Refinitiv Lipper. Municipal bond yields, which rise as prices fall, climbed last week after the Federal Reserve signaled it would begin steadily raising interest rates in mid-March, reducing the appeal of outstanding debt. Yields on the highest-rated state and local bonds jumped to 1.55% Monday from 1.34% last Tuesday, according to Refinitiv MMD. Returns on the S&P Municipal Bond Index have fallen to minus 2.33% this year through Jan. 28 ... the lowest YTD returns in at least 16 years."
Also, a BFI sidebar, "Federated Earnings on BFs," explains, "Federated Hermes' CEO Chris Donahue says on the company's latest earnings call, 'Fixed income separate account net sales were driven by high yield [and] multisector strategies.... Net redemptions occurred in ultra-short bond fund and certain other short-duration strategies.... In the fourth quarter, we successfully launched our first 2 active transparent ETFs, an investment-grade short-duration corporate bond fund and a high-yield short-duration bond fund.'"
Finally, another sidebar, "Bond Funds See Outflows," tells readers, "Bond fund assets dropped $7.6 billion in December and are falling again in January, after hitting a record $5.6 trillion in November. ICI's 'Combined Estimated Long-Term Fund Flows and ETF Net Issuance,' comments, 'Bond funds had estimated outflows of $19.88 billion for the week, compared to estimated outflows of $11.37 billion during the previous week. Taxable bond funds saw estimated outflows of $15.60 billion, and municipal bond funds had estimated outflows of $4.28 billion.' Over the past 5 weeks, bond funds and ETFs have seen outflows of $18.720 billion."
