Investors Send $3 Billion to Investment Grade Corp. Debt Funds, 7th Weekly Inflow in 8

During Refinitiv Lipper’s fund-flows week that ended May 24, 2023, investors were overall net purchasers of fund assets (including both conventional funds and ETFs) for the sixth week in a row, adding a net of $47.2 billion.

Money market funds (+$43.1 billion) and taxable-bond funds (+$5.5 billion) were the only macro-groups to report inflows. Equity funds (-$513 million) and tax-exempt bond funds (-$847 million) suffered outflows.

Index Performance

At the close of Refinitiv Lipper’s fund-flows week, U.S. broad-based equity indices reported negative returns – the Russell 2000 (-0.42%), Nasdaq (-0.13%), S&P 500 (-1.05%), and DJIA (-1.86%) were all down in negative territory. The Nasdaq, Russell 2000, and S&P 500 observed their first weekly losses over the past four weeks.

The Bloomberg Municipal Bond Total Return Index (-1.31%) recorded its third weekly loss in the past four weeks. The Bloomberg U.S. Aggregate Bond Total Return Index (-0.94%) logged its third consecutive week in the red.

Overseas indices traded mostly down – Nikkei 225 (+0.80%), Shanghai Composite (-3.01%), FTSE 100 (-2.04%), and DAX (-1.22%).

Rates/Yields

The 10-two Treasury yield spread remained negative (-0.63), marking the two-hundred-and-thirty-second straight trading session with an inverted yield curve. The 10-year Treasury yield rose 4.50% on the week, while the two-year yield increased by 5.13%.

According to Freddie Mac, the 30-year fixed-rate average (FRM) increased for the second consecutive week – currently at 6.57%. Both the United States Dollar Index (DXY, +0.98%) and VIX (+16.03%) rose over the course of the week.

Market Recap

Our fund-flows week kicked off on Thursday, May 18, with strong equity market returns – Nasdaq (+1.51%), S&P 500 (+0.94%), Russell 2000 (+0.58%), and DJIA (+0.34%) were all in the black. House Speaker Kevin McCarthy was hopeful that an agreement would be reached in principle to raise or suspend the debt ceiling limit as early as the weekend. Treasury yields increased on the day with the 10-year yield jumping 2.18%. The two-year yield rose to 4.26% (+2.65%) to end the day as investors are now increasingly betting on a quarter-point rate hike in the Federal Reserve’s June 13-14 meeting. Dallas Fed President Lorie Logan came out and said that she’s not in favor of a rate hiking pause based on current data. According to the CME FedWatch tool, the chances of a 25-basis point (bps) rate bump increased from 10.7% to 37.8% over the past seven days.

On Friday, May 19, equity markets retreated on the day as no agreement was reached in the debt ceiling talks – the Russell 2000 (-0.62%), DJIA (-0.33%), Nasdaq (-0.24%), and S&P 500 (-0.14%) were all down. The U.S. Census Bureau published its Quarterly Services Survey which showed that U.S. selected services had a total revenue of $5.2 billion in the first quarter of 2023, a 2.9% increase from the previous quarter and a 9.6% increase from the first quarter of 2022. Utilities saw a 6.7% increase quarter over quarter, while transportation and warehousing realized a 7.7% decrease. Fed Chair Jerome Powell said on Friday that officials “can afford to look at the data and the evolving outlook to make careful assessments.” Powell ultimately said the Fed is still unclear if the U.S. will need a further rise in the Fed funds rate.

On Monday, May 22, negotiations revolving around the debt ceiling continued. President Joe Biden and Speaker McCarthy both said that both political parties will keep negotiating on a debt limit deal to avoid any U.S. default scenario. Regional bank stocks fared well as PacWest Bancorp (PACW) was able to offload a portfolio of loans. Small-cap-focused Russell 2000 had a nice day returning a positive 1.22%, while the DJIA fell 0.42%. Treasury yields all rose on the day, led by the five-year yield (+2.19%).

On Tuesday, May 23, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development announced the April residential sales statistics. The report showed a 4.1% month-over-month increase to a seasonally adjusted annual rate of 683,000. This figure is also 11.8% above last year’s April numbers. The S&P Global Flash U.S. Composite PMI was also published Tuesday which showed that companies saw an increase in business activity during May. The headline S&P Global Flash U.S. PMI Composite Output Index was up to 54.5 from April’s 53.4 – this rise in output was the fastest since April 2022. Equity markets fell on the day – the Nasdaq (-1.26%), S&P 500 (-1.12%), DJIA (-0.69%), and Russell 2000 (-0.43%) were all down.

Our fund-flows week wrapped up Wednesday, May 24, with equity markets falling for the second straight session, led by the Russell 2000 (-1.16%). Treasury yields increased slightly on the day – the two- and 10-year Treasury yields rose 0.76% and 0.35%, respectively. The Mortgage Bankers Association (MBA) Market Composite Index showed that mortgage applications dropped 4.6% from last month as the 30-year fixed-rate conforming home loan average jumped to its highest level since March 10. Negotiations to raise the federal debt ceiling and avoid a possible government default stalled leading to Fitch placing the United States on Rating Watch Negative. The ratings agency wrote this was due to “increased political partisanship that is hindering reaching a resolution to raise or suspend the debt limit.” The CME Fed Watch Tool now has a percentage of a 25 bps increase in June at 48.2%, significantly higher than where we were one month ago (8.3%).

Exchange-Traded Equity Funds

Exchange-traded equity funds recorded $7.2 billion in weekly net inflows, marking the fifth weekly intake in seven. The macro-group posted a 1.06% loss on the week, its first week in the red over the last four.

Growth/value-large cap ETFs (+$4.1 billion), growth/value-small cap ETFs (+$2.0 billion), and international equity ETFs (+$1.1 billion) were the top subgroups to log inflows. Growth/value-large cap ETFs have logged five straight weeks with a positive four-week flow moving average, despite suffering their seventh weekly loss of the year (-0.92%). This subgroup currently has a year-to-date outflow of $4.3 billion but has attracted inflows in five of the past seven weeks.

Sector-energy ETFs (-$484 million), growth/value-aggressive ETFs (-$297 million), and sector-real estate ETFs (-$77 million) were the largest outflows under the macro-group. Sector-energy ETFs have been bleeding capital for seven straight weeks with only three weeks of inflows this year. This subgroup has posted gains in three straight weeks.

Over the past fund-flows week, the top two equity ETF flow attractors were SPDR S&P 500 ETF (SPY, +$2.1 billion) and iShares: Russell 2000 ETF (IWM, +$1.9 billion).

Meanwhile, the bottom two equity ETFs in terms of weekly outflows were Direxion: Semiconductor Bull 3X Shares (SOXL, -$525 million) and Select Sector: Technology SPDR ETF (XLK, -$332 million).

Exchange-Traded Fixed Income Funds

Exchange-traded fixed-income funds observed a $5.7 billion weekly inflow – the macro-group’s third consecutive weekly inflow. Fixed-income ETFs reported a weekly return of negative 0.58% on average, their third straight week in the red.

Corporate-investment grade ETFs (+$2.2 billion), corporate-high yield ETFs (+$1.6 billion), and government-Treasury ETFs (+$1.6 billion) were the top taxable fixed income subgroups to post inflows over the week. Corporate-investment grade ETFs attracted their third straight weekly inflow despite three straight weeks of losses. This subgroup also recorded a negative weekly performance (-0.36%). Government-Treasury ETFs have now logged 14 weeks of inflows in the past 15.

International & global debt ETFs (-$298 million), balanced funds ETFs (-$5 million), and government-Treasury & mortgage ETFs (-$4 million) were the only taxable fixed-income subgroups to witness outflows on the week. International & global debt ETFs have suffered five straight weeks of outflow with the last three coming with sub-zero performance.

Municipal bond ETFs reported a $1 million outflow over the week, marking their third outflow in the last four. The subgroup realized a negative 1.14% average, marking back-to-back weeks in red.

iShares: 20+ Treasury Bond ETF (TLT, +$1.7 billion) and iShares: iBoxx $High Yield Corporates (HYG, +$1.5 billion) attracted the largest amounts of weekly net new money for taxable fixed income ETFs.

On the other hand, iShares: Short Treasury Bond ETF (SHV, -$425 million) and iShares: JPM USD Emerging Bond ETF (EMB, -$260 million) suffered the largest weekly outflows under all taxable fixed income ETFs.

Conventional Equity Funds

Conventional equity funds (ex-ETFs) witnessed weekly outflows (-$7.7 billion) for the sixty-eighth straight week. Conventional equity funds posted a weekly return of negative 0.71%, the first week of losses in four.

Growth/value-large cap (-$3.4 billion), growth/value-aggressive (-$1.1 billion), and growth/value-small cap (-$970 million) were the largest subgroup outflows under conventional equity funds. Despite three weeks of gains in four, growth/value-large cap funds have suffered 22 consecutive weeks of outflows. The four-week net flow moving average has remained negative for 70 weeks.

There were no conventional equity fund subgroups to report weekly inflows.

Conventional Fixed Income Funds

Conventional taxable-fixed income funds realized a weekly outflow of $264 million – marking their fourteenth straight weekly outflow. The macro-group logged a negative 0.65% on average – their third straight week of losses.

Balanced funds (-$382 million), flexible funds (-$288 million), and corporate-high yield funds (-$237 million) reported the largest weekly outflows under taxable fixed-income conventional funds. Balanced funds have seen 56 straight weeks of outflows as they record their second straight week of losses (-0.24%). Flexible funds have now observed 12 weeks of outflows in 13 while realizing eight weeks of gains in those same 12 weeks.

Conventional corporate-investment grade funds (+$857 million) and government-Treasury & mortgage (+$165 million) were the only taxable fixed-income macro-group to produce inflows. Corporate-investment grade funds realized their fourth straight weekly inflow despite three straight weeks of performance losses. After a record outflow ($-212.1 billion) during 2022, this subgroup has positive year-to-date flows of $12.3 billion.

Municipal bond conventional funds (ex-ETFs) returned a negative 1.29% over the fund-flows week – their second weekly loss in five. The subgroup experienced $847 million in outflows, marking the fourteenth straight week of outflows.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.