UK Investors Retreat from Bond Funds Amid Turmoil in Bond Markets
Risk-averse investors in the UK have been pulling out of fixed income and bond funds due to the recent turmoil in the bond markets in both the UK and the US. This comes as thirty-year gilt yields reached their highest levels since the September 2022 “mini” Budget, and the yield on thirty-year US Treasuries hit a 16-year high. The market volatility has led investors to lose confidence and make changes to their investment strategies.
Data from the Investment Association reveals that retail investors withdrew a net total of £356 million from fixed income funds in August. Additionally, funds network Calastone recorded an outflow of £330 million from bond funds in August, followed by a further £128 million in September. These figures indicate the scale of the retreat from bond funds by UK investors.
Edward Glyn, head of global markets at Calastone, commented on the current market situation, stating, “The bond markets are in the driving seat at the moment. One moment, inflation coming in better than expected or central banks hitting pause on interest rates causes a bond market rally… the next moment, policymakers [warn] that rates will stay high for the foreseeable future, bond yields surge and equity markets sag.” The uncertainty surrounding interest rates and government borrowing has put pressure on the bond markets and led to the decrease in investor confidence.
In contrast to fixed income funds, ultra-safe money market funds have seen an increase in popularity. Calastone’s data shows that these funds received net inflows of £862 million across August and September. Investors are seeking refuge in these low-risk options amidst the bond market volatility.
While Calastone’s figures are not exhaustive, they provide a snapshot of investment fund flows. The data suggests that UK funds are experiencing ongoing selling pressure, with £448 million of outflows in September alone. On the other hand, global funds saw inflows of nearly £1 billion during this period.
The data from Calastone also reveals a shift in investor preferences from actively managed funds to passive index funds, particularly global equity index funds. Active funds have seen retail outflows of £7 billion since the beginning of the year, while passive funds have gained approximately £5.4 billion. Emma Wall, head of investment analysis and research at Hargreaves Lansdown, explains that global equity, especially passive funds, has become popular due to their ease of access to cross-market exposure in a challenging market.
Experts are warning that a correction in the bond markets could occur in the short term, which would inevitably impact equity markets as well. Bank of America analysts note that a decline in real bond yields alone could boost equities. However, they emphasize that the full impact would depend on the macroeconomic conditions driving the decline in bond yields.
In light of these developments, Wall of Hargreaves advises investors to remain diversified across asset classes and geographies. This will ensure they are best prepared to navigate any market scenario that may arise in the future.
More detail via Financial Times News here… ( Image via Financial Times News )