US bond funds swell as investors seek safety

US bond funds swell as investors seek safety

Investors have flocked to US bond funds at the fastest clip in two months as volatile trading and a deteriorating growth outlook nudge investors into safer assets.

Fixed-income mutual funds and exchange traded funds added $11.5bn for the week ended Wednesday, the biggest weekly figure since early June and the fifth-largest on record, according to data from EPFR Global. US bond funds now hold $2.8tn, $200bn more than at the start of the year.

Safe government debt like US Treasury bonds have lured investors away from riskier investments like equities and high-yield bonds as they become uneasy that the long global economic expansion is set to turn.

The surge in buying activity sent the yield on the 10-year Treasury bond as low as 1.52 per cent on Thursday, a level not seen since 2016, while the 30-year government bond dropped to an all-time low. The 10-year Treasury briefly yielded less than two-year government debt this week, inverting the “yield curve” — a previously reliable signal of an impending recession, that added to investor skittishness.

“It’s dramatic,” said Henry Song, a portfolio manager at Diamond Hill Capital Management, speaking of the drop in Treasury yields. “It feels like we’ve had a mini cycle since 2016 — we’re now back at the level where the 10-year Treasury was three years ago.”

Bond ETFs accounted for $5.5bn of the week’s $11.5bn inflow, reflecting how investors have become comfortable using these kinds of funds for trading the fixed-income market.

Some investors warned the fear triggered by the yield curve inversion might be overdone. Positive economic data from the US, including retail sales figures on Thursday morning that outshone expectations, point to robust consumers, even if manufacturing data has been more mixed.

“If the domestic data continues to hold in, it follows intuitively that upward pressure on rates will result as near-term recession fears appear temporarily unfounded,” said Ian Lygen, head of US rates strategy for BMO. “The inversion in 2s/10s is a well-documented recessionary flag, but that need not imply a true contraction is imminent.”

Jim Tierney, chief investment officer for AllianceBernstein’s concentrated growth equities fund, said investors might be incorrectly expecting a US recession.

“Retail sales, inflation — these are all really good numbers,” Mr Tierney said. “Could we talk ourselves into a recession here? It sure feels like it.”

Additional reporting by Colby Smith

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