Global and Emerging Market bond funds tracked by EPFR took in another $907.6 million during the week ending February 2. That brought total inflows through the first five weeks of the year to $2.9 billion.
These flows continue to be driven by the sometimes contradictory goals of higher yield and lower risk. Investors, especially institutional ones, are looking for assets that will bolster revenues. But, with the global growth cycle rolling over and the US Federal reserve in tightening mode, their risk aversion is rising.
As a result, demand for developed market debt remains high despite the fact that better quality credits are now expensive. The 343 Global bond funds tracked by EPFR on a weekly basis took in $596.8 million during the fifth week of the year. Investors are still comfortable betting on “measured” tightening by the US Federal Reserve that is unlikely to trigger a sudden flight to dollar-denominated assets.
Emerging Markets bond funds, meanwhile, posted net inflows of $310.8 million as ratings upgrades for Russia and Mexico highlighted the improving fundamentals of this asset class. The yield spread between US Treasuries and the JP Morgan Emerging Markets Bond Index Plus has tightened to around 3.7%.
Demand, however, continues to run into ample supplies of emerging markets debt. And much of that supply has been sub-investment grade. Some if it has also been euro-denominated. Recent issues by Brazil and Lithuania in the euro show the broadening of emerging debt markets that is taking place.
The 217 high yield funds tracked by EPFR posted their fifth straight week of outflows as the growing risk aversion of investors continues to bite. But demand for the better quality credits in their portfolios pushed up their collective value by $427.4 million for the week.
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