Bond mutual funds rake in $108B to snap two-year flows drought

Fixed-income mutual funds are doing something rare: Attracting new money — and besting their tax-efficient ETF brethren.

Nearly $110 billion has flowed into mutual funds so far this year, with the bulk of the cash gravitating towards active managers, Bloomberg Intelligence data show. It breaks two straight years of net outflows that saw the industry bleed more than half a trillion dollars.

Investors are pouring into both mutual funds and exchange-traded products to lock in lofty yields across the fixed-income landscape before the Federal Reserve kicks off its campaign to cut interest rates.

Yet while inflows into ETFs — which typically offer low fees and ample liquidity — have outpaced their mutual-fund counterparts for the past two years, the trend has flipped so far in 2024. Debt ETFs have attracted a comparatively modest $67 billion.

“Investors have continued to pile into bond funds for elevated yields,” Bloomberg Intelligence mutual fund analyst David Cohne said. “Part of it is investors wanting to get the yield now, in case the Fed does decide to cut rates.”

Wagers on the central bank’s first interest-rate reduction have been pushed later into 2024 amid a raft of strong economic data, yet traders aren’t placing meaningful odds on the possibility that policy makers will hike rates again.

The influx comes even as the drawdown in US bonds continues. Sticky inflation and still-strong economic growth have fueled yields on 10-year Treasuries to just below 4.7% currently, after entering the year near 3.9%. The average rate on US high-grade bonds has backed up to about 5.7% from just about 5% at the start of 2024.

Meanwhile, life remains tough for mutual-fund managers trading stocks. These products have shed money every single year since 2015 — while equity ETFs have instead absorbed trillions of dollars.

“Fixed income is hot, and it’s not really a story about the vehicle of access so much as it about yields,” VettaFi’s Lara Crigger said on Bloomberg Television’s ETF IQ on Monday. “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.”