Fund flows make screeching U-turn after election

Money flows out of bonds into stocks.
NOV 18, 2016
Exchange-traded fund flows made a violent U-turn in the middle of Wall Street after the presidential election. Investors have been making a massive exodus from stock ETFs and open-ended funds for years. In the 12 months ended October, investors have yanked an estimated $149.9 billion from stock funds, according to Morningstar, while pouring $76.6 billion into taxable bond funds and $61.4 billion into municipal bond funds. All that came to a screeching halt after the election, according to Bank Of America/Merrill Lynch. Wall Street decided that Donald Trump's election as president meant that the U.S. would spend more on infrastructure – which, in turn, meant an increased likelihood of job growth, inflation and deficits. That analysis turned fund flows upside down. During the first post-election week, U.S. stock ETFs and funds saw a $25.4 billion net inflow and a $9.1 outflow from bonds. For stocks, it was the largest inflow since December 2014. Outflows from high-quality bonds and high-yield bonds were modest, says Bank of America. But municipal bond funds saw a big outflow — $3 billion — possibly because large infrastructure spending promised by the incoming Trump administration could mean an increase in new bonds, which would send yields higher and prices lower. Investors also fled emerging markets bonds the week of November 10 through 16 — an estimated $6.6 billion outflow. It was the largest outflow from global emerging markets bonds since records began in 2009. “One thing that surprised us was the magnitude of the flow into financials,” said Brian Leung of Bank of America's Global Investment Strategy Group. Investors poured $7.2 billion into the sector in the week following the election, hoping that banks fare better with higher interest rates and stronger growth. “It's only been one week, but we'll see if this change continues,” he said. Fund flows follow performance, and bond performance has been rotten leading up to the election and past it. The yield on the 10-year Treasury note rose from an all-time low of 1.37% July 8 to 1.83% the day before Election Day. It closed at 1.31% Thursday. Since the low in yields, long-term bond funds have fallen 8.4%, according to Morningstar, and long-term government bond funds have tumbled 13.9%.

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