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U.S. bond funds are raising more money, despite fears of inflation

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Net investments in U.S. funds are much higher than those for comparable equity instruments this year, confusing expectations that fears inflation it would dampen the appeal of companies to fixed income.

According to the Institute of Investment Management, mutual funds and exchange-traded funds totaled $ 372 billion as of June 23, compared with a gain of $ 160 billion per share. Bond funds are on track to eclipse $ 446 billion in revenue in 2020 and $ 459 billion in 2019.

Analysts have attributed the popularity of bond funds – which do not include money market holdings – to concerns about high stock valuations and the need for a population that grows stable income during retirement.

“Financial advisors follow asset allocation models and portfolio rebalancing and demographics are strong trends,” said Shelly Antoniewicz, ICI’s senior director of financial and industrial research. “The cumulative flow for bond funds aligns well with the percentage of the population over 65 years of age.”

The preference for fixed income securities comes as stocks have outperformed bonds. The S&P 500 has gained 15.9 percent, including dividend reinvestment, through 2021, and commanding its highest expensive evaluation since the 2000 internet boom.

The government’s high performance of high-quality government and corporate bonds remains negative this year. Its performance has been hit hard as 10-year U.S. market interest rates rose in early 2021 due to expectations that large-scale fiscal and monetary stimulus would lead to a strong economic recovery – and a warmer inflation.

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Financial advisors have played a role in strengthening bond funds by organizing clients to maintain a balance between stocks and fixed income. Periodic rebalancing of the portfolio involves the sale of assets that are performing well and the acquisition of those that are lagging behind. Pension plans have also changed from titles to long-term bonds to meet the needs of retirees.

“Retirement plans are now at much better funding levels and it is a prudent strategy to block their capital gains and immunize the portfolio against the risk of a large decrease in shares,” said Mark Vaselkiv, head of official fixed income investment in T Rowe The price. “We expect a new rotation in bonds from asset allocators.”

The high-yield debt bar chart is a bright spot in fixed income (total yield,%) that shows Equity leaving the bond market in 2021

Erin Browne, multi-asset strategy portfolio manager at Pimco, said higher interest rates in the U.S. than in Europe or Japan had also provided “a powerful driver of foreign purchase demand for fixed income. of the United States “.

US bond flows this year have been split into mutual funds and ETFs. Investors have favored actively managed funds that can mitigate losses from rising market interest rates and inflation-protected bonds, variable rate debts and municipal charters that provide tax-exempt income.

According to the ICI, capital investors have preferred ETFs to mutual funds, which have experienced outflows this year.


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