Mutual Funds

Lust for yield hard to shake, bond funds attract $11.4 bln: BAML

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Investors shoveled $11.4 billion into bond funds in the past week indicating a persistent "lust for yield," Bank of America/Merrill Lynch (BAML) said on Friday, with rumors of a potential European Central Bank tapering not yet impacting flows.

Bond markets were spooked by a media report on Tuesday that the European Central Bank (ECB) will probably wind down its 80-billion-euro monthly bond purchases gradually before ending its quantitative easing program.

The ECB tweeted a denial, but euro zone bond yields still rose to two-week highs in early Wednesday trade.

Fund flows do not yet indicate that investors are bailing out of fixed income, however, with bond funds attracting their biggest inflows in 13 weeks in the week to Wednesday, the survey found. At the same time, investors pulled $6.4 billion from equity funds.

Since Britain's June 23 shock vote in favor of leaving the European Union, bond funds have enjoyed $102 billion of inflows, compared with $25 billion of outflows from equity funds, BAML noted.

"This is largely down to the ongoing 'lust for yield' in fixed income," the bank said, adding in the last week investment grade bond funds had attracted $4.9 billion, high yield bond funds $2.5 billion and emerging market debt funds $2 billion.

However, BAML noted that G-20 politicians were implicitly admitting they needed to spend more money on voters and less money on bonds in the next 12 months, citing British Prime Minister Theresa May's comments about the side effects of the Bank of England's low interest rates and quantitative easing program.

BAML argued that a strong U.S. non-farm payrolls number of greater than 225,000 could also extend the bond sell-off. The bank noted that Fed rate hike expectations for December were already at 64 percent, compared with less than 50 percent last month.

The bank also highlighted an outflow of $7.2 billion from U.S. equity funds over the week, while European equity funds lost $1.6 billion in a record 35th straight week of outflows.

Emerging market equity funds remained in favor, attracting $1 billion, and Japanese equity funds attracted $800 million.

BAML also noted outflows from "bond proxy" stocks such as utilities, telecoms and real estate investment trusts, with investors rotating into tech stocks, financials and materials funds.