Capital flows into bonds are increasing again

Photo: Adam Berry/ Getty Images for Sony Pictures.

After selling aggressively in the wake of Donald Trump winning the US presidential election in early November, investors are now starting to wade back in the bond market, according to new research from Jefferies.

According to the group, citing data from EPFR Global, net capital inflows of $US7.8 billion were recorded in the week to January 11, the third week in succession and the largest total seen in 14 weeks.

Jefferies said that inflows into bond funds were broad-based geographically and by category, with the exception of government bond markets.

Given signs that inflationary pressures are continuing to build, net inflows into inflation-protected bonds also jumped to a 7-week high.

The inflows into bonds — unsurprisingly — corresponded with a decline in bond yields in many developed economies, a move that sparked by concern among some investors that the so-called Trump “reflation trade” — built around expectations for higher US economic growth, inflation and interest rates — had moved too far too fast in the week’s following Trump’s election victory.

Putting the cart before the horse, in other words.

This chart from Jefferies shows net cumulative capital flows into global bonds, stocks, commodities and money market funds over the past year:

However, despite growing concerns about the merits of the reflation trade among some analysts, that didn’t stop investors from tipping more funds into stocks, says Jefferies, noting net capital inflows into both developed and emerging markets.

“Global equity funds saw their second weekly inflow at $US7.7 billion, the largest in four weeks,” said the group.

“While emerging market equities recorded their first weekly inflow in four weeks, developed market equities witnessed more broad-based injections by market.

“Notably the $US2.3 billion inflow seen in Europe was a year’s high with all the markets within the region experiencing net injection,” it added.

Elsewhere, net capital flows into US stocks totalled $US556 million for the week with investors seemingly favouring small cap stocks over their larger peers.

Net capital inflows into US stocks have now risen in nine of the past ten weeks, and in 12 of the past 14 weeks for Asian markets.

While flows continued into stocks and bonds, investors continued to liquidate positions in commodity funds with capital outflows totalling $US336 million, the ninth week in a row that net outflows were recorded.

“Gold, silver and precious metals, along with agricultural, have been more consistent casualties,” said Jefferies.

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