Bond funds have seen unprecedented outflows. According to Refintiv Lipper data released yesterday, U.S. investment-grade bond funds saw $35.6 billion pulled in the week ending March 18th. To put that in context, the previous “record” was $7.3 billion that had been established just the week before. If that isn’t enough, municipal bond funds experienced withdrawals that were nearly 3 times greater than the previous record, as $12.2 billion was taken out. Actually, nothing was spared within the universe of bonds, as mortgage, high yield, and leveraged loan funds also experienced nearly unprecedented activity.
What is inspiring this dramatic pace of withdrawals? Are the actions specific to fears related to the bonds themselves, such as lower quality corporate bonds that might be in industries most susceptible to the impact from the Coronavirus or are their other reasons? One explanation may be a tactical move back into equities, as DB pension plans, E&Fs, and individuals rebalance their asset allocation back to equities following their precipitous fall. There is some support for the latter explanation, as Vanguard S&P 500 ETF had experienced 19 straight days of inflows until Tuesday.
At Ryan ALM, we have been encouraging our clients and prospects to sell long-dated treasuries (10-years and longer) to take advantage of the strong performance that they’ve experienced and to use those proceeds to establish a cash flow matching portfolio to defease the plan’s, in the case of DB plans, Retired Lives liability. With the nearly unprecedented widening that we’ve witnessed in the yield spreads of corporates, both investment grade and high yield, relative to Treasuries, we believe that the timing is very good.