The February issue of our Bond Fund Intelligence, which was sent to subscribers Tuesday morning, features the stories, "OFR Annual Report Cites Bond Funds as Big Systematic Risk," which reviews OFR's Annual Report to Congress 2022, and "J.P. Morgan Publishes Low Duration Bond Fund Update," which reviews the latest on ultra-short bond fund flows and returns." BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund returns jumped in January while yields dropped. 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. Also: Please join us for Crane's Bond Fund Symposium, which will be held March 23-24, 2023, in Boston, Mass.)
Our "OFR Annual Report" article says, "Last month, the U.S. Treasury's Office of Financial Research published its 'Annual Report to Congress 2022,' which contains a section relating to risks in bond mutual funds. They tell us, 'Open-end bond mutual funds share some similar inherent structural vulnerabilities as money market funds because they offer daily redemptions to fund investors while holding relatively less-liquid debt securities that may be challenging to sell in stress periods. In general, the limited liquidity of bond fund holdings is a product of broader liquidity concerns in U.S. bond markets, because most U.S. debt securities are traded over-the-counter, are transacted less frequently (except for U.S. Treasuries), and rely on dealer intermediation. These liquidity concerns explain both the appeal and the risks of bond funds, namely, that bond funds offer a more liquid alternative that is only possible because these funds engage in liquidity transformation.'"
It continues, "The report says, 'This liquidity mismatch can incentivize investors to redeem ahead of others ... in the face of a negative shock.... In addition, this liquidity mismatch can be exacerbated by dealers' shrinking securities inventories, particularly in over-the-counter fixed-income securities, relative to the growth in open-end fund assets.'"
Our "Low Duration" piece states, "A recent J.P. Morgan 'Mid-Week US Short Duration Update' includes a 'Low duration bond fund update.' They write, 'Consistent with the broader U.S. fixed income markets, total short-term funds (effective duration of 1.5-3.5y) and ultra-short term bond funds (effective duration of 0.5-1.5y) saw significant outflows last year prompted by the Fed's aggressive tightening agenda. Based on the bond funds we track, low duration bond fund AUMs declined by an estimated $150bn (or 15%) YoY, to $841bn as of December-end: short-term fund AUMs declined by $117bn, and ultra-short term fund AUMs declined by $33bn.'"
It continues, "The piece tells us, 'Not surprisingly, short-term credit funds saw most of the outflows last year (-$118bn) given their longer duration relative to ultra-short bond funds and money funds. In fact, total returns for short-term bond funds significantly underperformed last year, delivering substantial negative total returns on a 1y basis relative to ultra-short bond funds and MMFs.... In contrast, MMFs meaningfully outperformed as they benefitted from extremely low WAMs and quicker resets in an aggressively rising interest rate environment.'"
Our first News brief, "Returns Jump, Yields Plummet in Jan.," states, "Bond fund returns rebounded sharply in January while yields fell for all sectors beyond the short-term. Our BFI Total Index rose 2.52% over 1-month but is down 4.84% over 12 months. The BFI 100 rose 2.78% in Jan. and lost 5.92% over 1-year. Our BFI Conservative Ultra-Short Index was up 0.70% over 1-month and is up 0.99% for 1-year; Ultra-Shorts rose 0.85% but are up just 0.11% over 12 mos. Short-Term returned 1.39% and -2.69%, and Intm-Term rose 3.11% and -7.62% over 1-year. BFI's Long-Term Index rose 3.98% and -10.10%. High Yield rose 3.28% in Jan. and fell 3.78% over 1-year."
A second News brief, "Reuters: U.S. Bond Funds Gain Inflows for Fourth Week in a Row," quotes, "U.S. bond funds drew money inflows for a fourth straight week in the seven days to Feb. 1, on hopes of slowing rate hikes, with its economy grappling against a slowdown. Refinitiv Lipper data showed investors purchased a net $197 million worth of U.S. bond funds, although a big drop from the previous week's $4.84 billion."
Another brief, "Barron's Says, 'Bonds Take Flight. But Investors Should Brace for Bumps Ahead.' The article explains, 'Fixed income is off to a flying start in 2023, a major turnaround from last year. But the path ahead looks bumpier. The rally has swept through nearly all fixed-income sectors. In investment-grade bonds, the iShares Core U.S. Aggregate Bond ETF <b:>`_(AGG) is up 4.1%. More impressive are gains in long-term bonds, with the `iShares 20+ Year Treasury Bond ETF (TLT) ahead 8.9%, clawing back a bit of last year's 31% fall.'"
A BFI sidebar, "New Vanguard Multi-Sector," cites the press release, "Vanguard Expands Fund Lineup with Multi-Sector Income Bond Fund." It explains, "Vanguard ... announced that the actively managed Vanguard Multi-Sector Income Bond Fund is now available for public investment, offering investors diversified exposure to fixed income credit sectors. The fund, managed by Vanguard Fixed Income Group, provides clients with a flexible, risk-controlled approach that enables portfolio managers to seek the best opportunities across various sectors and credit qualities."
Finally, another sidebar, "Federated Earnings on BFs," says, "Federated Hermes briefly discussed bond funds during its Q4'23 earnings call. CEO Chris Donahue comments, 'Federated Hermes' record assets at year-end 2022 were driven by money market asset increases and investor interest in our flagship Total Return Bond Fund and related separate accounts.... [I]nvestors valued our investment perspective as they sought haven from market volatility in a diverse range of Federated Hermes products -- from money market funds to low-duration fixed-income options.'"
