Continued uncertainty around interest rates could create further pressure on credit fund flows, according to a research report from BofA Securities. The firm said elevated interest rate volatility is making investors more cautious about riskier assets and encouraging a shift towards relatively safer investments such as government debt.
BofA Securities noted that the current interest rate volatility environment is unlikely to support credit funds in the near term. Volatility is currently around 90 points on the SMOVEU3M index.
The SMOVEU3M is the ICE BofAML Swap MOVE 3-Month Index, which measures market-implied interest rate volatility by tracking three-month over-the-counter (OTC) interest rate swaps.
Weekly Fund Flows Under Pressure
According to the report, volatility in the rates market is directly affecting the strength of flows into bond funds. Government bond, money market and high-yield funds all reported outflows during the week under review.
High-grade funds returned to positive inflows after two consecutive weeks of withdrawals. However, BofA Securities said it remains uncertain whether this recovery can continue if interest rate volatility stays elevated.
Within the high-grade category, mid- and long-term funds attracted fresh investments, while short-term funds experienced outflows. This ended a six-week run of inflows for short-term funds.
High-yield funds registered their third straight week of outflows. Government bond funds also shifted back into outflow territory, while money market funds recorded another week of withdrawals, marking their second consecutive week of outflows.
Emerging Market Debt Funds Remain Strong
Emerging market debt funds provided a notable exception to the broader trend. Global emerging market debt funds continued to attract investor money for the eighth consecutive week.
Across the wider fixed-income market, fund flows turned positive again during the week. Equity funds, however, extended their outflow streak to two weeks. Equity ETFs moved in the opposite direction, recording inflows for the eighth consecutive week.
EPFR Global Data Shows Mixed Trends
EPFR Global data showed that European-domiciled investment-grade funds attracted USD 388 million during the week ending September 23.
At the same time, high-yield funds recorded USD 340 million in outflows. Government bond funds saw withdrawals of USD 150 million, while money market funds registered much larger outflows of USD 3.31 billion.
Global emerging market debt funds remained one of the stronger areas, receiving USD 4.74 billion during the week. Their total inflows for the year so far have reached USD 49.33 billion, according to the BofA Securities report.
The assessment indicates that movements in interest rate volatility could remain an important factor influencing credit-market fund flows in the near term.
Disclaimer
This article is intended solely for general informational purposes and should not be considered investment advice or a recommendation to buy or sell any financial product. Market conditions and fund flows can change, and investors should conduct their own research and consult a qualified financial adviser before making investment decisions.