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Investors on pace to plow a record amount of money into corporate bonds in March

Key Points
  • Bank of America credit strategists say that inflows into high-grade bond funds are on pace for a record month, ahead of the prior January 2018 surge.
  • Inflows to U.S. high-grade funds and exchange-traded funds have averaged $846 million per day in March, ahead of the $800 million average per day last January.
  • The pivot into investment-grade debt comes as a growing number of economists and investors believe the U.S. economy is poised for a slowdown.

Investors are barreling toward the bond market as inflows look to break a new monthly record.

Inflows to U.S. high-grade funds and exchange-traded funds have averaged $846 million per day in March, ahead of the $800 million average during the record month last year, according to research from Bank of America Merrill Lynch.

The previous record for corporate bond inflows was $38.4 billion in January 2018.

"Based on daily fund and ETF inflows, March is on track to set a new monthly record," Bank of America credit strategists Yuri Seliger and Yunyi Zhang wrote Wednesday.

"Inflows this year have been delayed relative to earlier periods of strong bond price appreciation," the strategists added. "Given the more stable macro conditions currently flows catching up to the historical trend could provide another catalyst for stronger inflows."

The iShares iBoxx Investment Grade Corporate Bond ETF, just one of many such funds, has alone seen inflows of more than $600 million in the past month and about $440 million since the start of March.

The pivot into investment-grade debt comes as a growing number of economists and investors believe the U.S. economy is poised for a slowdown in the next year. Yields of ranging quality have been under pressure ever since the Federal Reserve downgraded its forecast for the American economy last week, when it decided to leave its overnight lending rate unchanged.

Some investors may view corporate debt as a somewhat safer bet over a volatile equity market despite sharp gains in the S&P 500 this year. Though the broad, large-cap index is up more than 11 percent this year, fund flows have not kept pace. The SPDR S&P 500 ETF, one of the largest in the world with over $260 billion under management, has seen outflows of more than $10 billion since the year began.

"Data arriving since September suggest that growth is slowing somewhat more than expected," Fed Chairman Jerome Powell said last week. "While the U.S. economy showed little evidence of slowdown through the end of 2018, the limited data we have so far this year have been somewhat more mixed."

The yield on the benchmark 10-year Treasury note is down more than 25 basis points since last Monday, falling under the rate on the 3-month Treasury bill. On the corporate side, companies in the U.S. have taken advantage of low interest rates both to grow business and reward shareholders, ballooning their own debt sums.

"Flows follow returns and the drop in interest rates since Monday of last week should encourage potentially even stronger inflows in April," Seliger and Zhang added.

While companies have thus far been able to find buyers for their debt, many market participants are keeping a close eye for changes in the economy and confidence. Both February payrolls data and March consumer confidence disappointed investors recently, pressuring investors out of equities and into safer markets like debt.

Total corporate debt has swelled from nearly $4.9 trillion in 2007 as the Great Recession was just starting to break out to nearly $9.1 trillion halfway through 2018, quietly surging 86 percent, according to Securities Industry and Financial Markets Association data.