Bond funds raked in nearly $400 billion in the first half of 2024

By Joy Wiltermuth

Investors are pouring into fixed-income funds as interest-rate cuts by global central banks begin

Investors have been pouring into bond funds this year as interest-rate cuts begin trickling out from global central banks.

Bond funds have attracted nearly $400 billion in net inflows already this year - about 51% of the full-year record total set in 2021, according to EPFR data.

"Actively managed funds have absorbed the biggest share of the flows so far this year," said Cameron Brandt, director of research at EPFR, in a Monday client note.

Actively managed fixed-income funds were punished heavily in 2022 as the Federal Reserve and other global central banks began raising rates to fight inflation.

Rate increases pummeled low-coupon bonds that were issued in the low-rate environment of the past decade, especially as newly issued securities began offering some of the highest yields seen in the last 15 years.

The hard-hit Bloomberg U.S. Treasury 20+ Year bond index is on pace for a 1.1% return this month to date, but is still facing a minus 30.4% three-year return, according to FactSet data

Similarly, the iShares 20+ Year Treasury Bond ETF TLT is on pace for a three-year return exceeding minus 30%.

Yet the pivot to rate cuts has already begun, with the European Central Bank in June cutting rates by 25 basis points to 3.75%, from a record 4%.

While the Fed typically kicks off global rate cuts, its policy rate has remained in the 5.25% to 5.5% range, near a two-decade high. But an uptick in the U.S. unemployment rate to 4.1% in June and other signs of a potential weakening for the American economy has more investors anticipating that the Fed will soon lower rates.

Read: Fed's Goolsbee makes case for rate cut in coming months, citing 'warning signs' of a slowdown

U.S. stocks SPX DJIA COMP touched fresh record highs at midyear, while the 10-year Treasury yield BX:TMUBMUSD10Y has retreated from a pandemic high of 5% to about 4.27% as of Monday, according to FactSet. That compares with 3-month Treasury bills BX:TMUBMUSD03M that were trading at a yield of 5.35%.

-Joy Wiltermuth

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07-08-24 1404ET

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