Record $600bn pours into global bond funds in 2024

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Investors poured record amounts into global bond funds this year as they bet on a shift towards easier monetary policy by major central banks.

Bond funds attracted more than $600bn in inflows so far this year, according to data provider EPFR, topping the previous high of almost $500bn in 2021, as investors sensed that slowing inflation would be a turning point for global fixed income.

This “was the year that investors bet big on a substantial shift in monetary policy” that has historically supported bond returns, said Matthias Scheiber, a senior portfolio manager at asset manager Allspring.

A mix of slowing growth and slowing inflation encouraged investors to plough into bonds at “elevated” yields, he added.

The record flows came despite a patchy year for bonds, which rallied over the summer before giving up their gains by the end of the year on rising concerns that the pace of global rate cuts will be slower than previously expected.

The Bloomberg global aggregate bond index — a broad benchmark of sovereign and corporate debt — surged in the third quarter of the year but has slumped over the past three months, leaving it down 1.7 per cent for the year.

The Federal Reserve this week lowered rates by a quarter of a percentage point, its third cut in a row. But signs that inflation is proving more stubborn than hoped meant the central bank signalled a slower pace of easing next year, sending US government bond prices lower and the dollar to a two-year high.

Despite record inflows into bond funds over the course of the year, investors withdrew $6bn in the week to December 18, the biggest weekly outflow in almost two years, according to EPFR data.

The 10-year US Treasury yield — a benchmark for global fixed income markets — is currently back up at 4.5 per cent, having started the year below 4 per cent. Yields rise as prices fall.

Investors piling into bond funds were driven by a “widespread fear about a [US] recession coupled with disinflation,” said Shaniel Ramjee, co-head of multi-asset at Pictet Asset Management.

“While disinflation occurred, the recession didn’t,” he said, adding that for many investors, the high starting yields on government bonds might not have been enough to make up for losses in price experienced during the year.

Corporate credit markets have been more resilient, with credit spreads above corporate bonds reaching their lowest in decades in the US and Europe. That prompted a surge in bond issuance as companies sought to take advantage of easy money conditions.

Risk-averse investors have also been attracted to fixed-income products as equities, particularly in the US, have become increasingly expensive, according to James Athey, a bond portfolio manager at Marlborough.

“US equities have been sucking up flows like there’s no tomorrow, but as interest rates have normalised investors have started to move back into traditionally safer bets,” he said.

“Inflation has come down pretty much everywhere, growth has softened pretty much everywhere . . . and that’s a much more friendly environment to be a bond investor,” Athey added.