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Continued uncertainty in interest rates could put further pressure on flows into credit funds, as elevated rates volatility is making investors more cautious about riskier assets, BofA Securities said in a research report.
The report noted that the current rates volatility backdrop is unlikely to provide a tailwind for credit funds, with volatility at around 90 points on the SMOVEU3M index. BofA said higher rates volatility tends to weaken flows into credit funds as investors prefer relatively safer assets such as government debt. The SMOVEU3M index is the ICE BofAML Swap MOVE 3-Month Index that measures interest rate volatility by tracking the market-implied volatility of 3-month over-the-counter (OTC) interest rate swaps. Rates market jitters are having a direct impact on flow strength into bond markets, the report said, noting that government bond, money market and high-yield funds recorded outflows in the week under review. While high-grade funds returned to inflows after two weeks of outflows, BofA Securities said it was sceptical that the recovery would continue if the higher rates volatility environment persists. Within high-grade funds, mid- and long-term funds attracted inflows, while short-term funds saw outflows, ending a six-week streak of inflows. High-yield funds recorded their third consecutive week of outflows, while government bond funds also moved back into outflow territory. Money market funds saw another week of outflows, marking their second consecutive week of withdrawals. However, global emerging market debt funds continued to attract money, extending their inflow streak to eight weeks. Overall, fixed-income fund flows reversed course and returned to inflows during the week, while equity funds extended their outflow streak to two weeks. Equity ETFs, in contrast, recorded inflows for an eighth consecutive week. Data from EPFR Global showed European-domiciled investment-grade funds received USD 388 million during the week ending September 23, while high-yield funds recorded USD 340 million of outflows. Government bond funds saw USD 150 million of outflows and money market funds recorded withdrawals of USD 3.31 billion. Global emerging market debt funds remained a notable area of strength, attracting USD 4.74 billion during the week. Year-to-date, such funds have received USD 49.33 billion, according to the report. BofA's assessment suggests that the direction of rates volatility will remain an important factor for credit-market flows in the near term. (ANI)
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