Bond Funds Attract $108B, Surpassing ETFs Amid Yield Hunt

Key Takeaway

• Bond mutual funds attracted $108 billion in 2024, reversing a two-year trend of outflows, amid high fixed-income yields.
• Despite strong economic data delaying Fed rate cut bets, investors flock to bonds for current high yields before anticipated cuts.
• Equity mutual funds continue to lose money since 2015, contrasting with bond funds' and equity ETFs' inflow surge.

Mutual Funds Attract New Capital

For the first time in years, fixed-income mutual funds are experiencing a significant influx of new money, reversing a trend of net outflows that plagued the industry for two consecutive years. According to Bloomberg Intelligence data, nearly $110 billion has been invested into mutual funds so far this year, with a notable preference for active managers. This resurgence in investor interest contrasts sharply with the previous period, during which the industry saw more than half a trillion dollars leave.

ETFs vs. Mutual Funds Dynamics

Despite the longstanding trend of exchange-traded funds (ETFs) outpacing mutual funds in terms of inflows, 2024 has marked a pivotal shift. Debt ETFs, known for their low fees and high liquidity, have attracted $67 billion, a figure that, while substantial, falls short of the inflows seen by mutual funds. This reversal highlights a changing investor sentiment, particularly in the fixed-income space, where mutual funds have regained favor.

Yield Hunting Before Rate Cuts

The driving force behind this shift is the pursuit of high yields in the fixed-income market, with investors rushing to lock in returns before the Federal Reserve initiates interest rate cuts. Bloomberg Intelligence mutual fund analyst David Cohne noted, "Investors have continued to pile into bond funds for elevated yields," emphasizing the anticipation of rate cuts by the Fed. Despite strong economic data delaying expectations for the central bank's first rate reduction to later in 2024, there's little expectation among traders for a rate hike.

Fixed Income's Appeal Amid Equity Struggles

The appeal of fixed income has surged, with yields on 10-year Treasuries nearing 4.7% and average rates on US high-grade bonds reaching about 5.7%. This attractiveness comes in stark contrast to the challenges faced by mutual-fund managers in the equity space, where products have seen consistent outflows since 2015. In contrast, equity ETFs have enjoyed substantial inflows, underscoring a broader shift in investor preferences towards fixed-income opportunities and away from traditional equity mutual funds.

Street Views

• David Cohne, Bloomberg Intelligence (Neutral on bond funds):

  "Investors have continued to pile into bond funds for elevated yields. Part of it is investors wanting to get the yield now, in case the Fed does decide to cut rates."

• Lara Crigger, VettaFi (Bullish on fixed income):

  "Fixed income is hot, and it’s not really a story about the vehicle of access so much as it about yields... You compare that to what we’re seeing in the equity space, we’re seeing massive inflows into equity ETFs but massive outflows from equity mutual funds for all the usual reasons of why people use ETFs."