The June issue of our Bond Fund Intelligence, which was sent out to subscribers Friday morning, features the lead story, "Low Duration Bond Funds See Steady Growth Says JPM," which discusses the continued strength in Ultra-Short Bond Fund inflows; as well as our profile, "Morgan Stanley Ultra Short Income's Kolk & Wachs," which interviews managers of one of the fastest growing Conservative Ultra-Short Bond Funds. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which again show lower bond fund yields and higher returns in May. We excerpt from the new issue below. (Contact us if you'd like to see our Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings data.)
Our lead story says, "Ultra-Short and particularly Conservative Ultra-Short Bond Funds continue to grow faster than all other Bond Fund categories, rising by 14.2% and 46.2%, respectively, compared to 6.6% for our BFI Total Index (all bond funds) in the 12-months ending May 31, 2019. (ETFs also continue to grow at a blistering pace, rising 36.2% over the past year.) J.P. Morgan Securities recently wrote on the rapid growth in the short end in a "Low duration bond fund update." We quote from their publication and we review the ultra-short and short-term sectors below.
It continues, "JPM's Alex Roever, Teresa Ho and Ryan Lessing write, 'This year has seen very strong demand in the front-end, with MMF inflows well above what has been typical in past years. Low duration bond funds, too, have seen steady growth. We estimate total AUM across short-term and ultrashort mutual funds and ETFs registered $691bn as of 4/30/19, up $32bn year to date and $114bn year over year.... Both ultrashort funds (those with a portfolio duration between 0.5 and 1.5 years), and short-term funds (with a longer duration of 1.5 to 3.5 years) have seen growth lately, with balances rising by $13bn and $19bn, respectively over the last 4 months. This represents something of a revitalization for short-term funds, which were relatively flat for most of 2018 as investors flocked to ultrashorts."
They explain, "In both the short-term and ultrashort space, the riskier multi-sector and credit styles have had higher returns than conservative credit and government funds, benefiting from both higher yields and tightening spreads. In addition to being more volatile from month to month, short-term funds continue to show more variation in returns between different funds."
Our "Morgan Stanley" interview says, "This month, we interview Morgan Stanley Investment Management's CIO & Co-Head of Global Liquidity Jonas Kolk and Global Head of Liquidity Products Scott Wachs. We discuss MSIM's Ultra Short Income Fund, which recently broke above $15 billion in assets and had its 3-year anniversary, and talk about the fund's history, its investment strategies and a number of other topics in the 'beyond cash' space. Our Q&A follows. (Note: We published some of this interview in our June Money Fund Intelligence, but this version contains some additional quotes.)
BFI says, "Tell us about your history." Kolk answers, "Given our history and some of the dynamics that we've gone through from a regulatory, and rate, standpoint, we viewed the ultra-short bond space as really a natural addition to our business. We thought that the conservative ultra-short space was a perfect opportunity to leverage our core capabilities and naturally extend our product line."
Our Bond Fund News includes the brief "Yields Lower, Returns Up Again in May." It explains, "Bond fund yields were lower (again) for most categories except Intm-Term and High-Yield. The BFI Total Index returned 0.81% for 1-month and 4.67% over 12 months. The BFI 100 returned 0.91% in May and 5.32% over 1 year. Our BFI Conservative Ultra-Short Index returned 0.27% over 1 month and 2.53% over 1-year; the BFI Ultra-Short Index averaged 0.26% in May and 2.56% over 12 mos. BFI Short-Term returned 0.60% and 3.67%, and BFI Intm-Term Index returned 1.38% and 5.64% for 1-mo and 1-year. BFI's Long-Term Index returned 1.85% in May and 6.84% for 1-yr; our High Yield Index returned -0.7% in May and 4.36% over 1-yr."
Another News brief quotes, "Bloomberg's 'No debt is short enough to ease bond buyers' recession fears.'" It states, "`Short-termism is taking on a whole new meaning in the U.S. bond market. Debt investors can't get enough of securities with less than 12 months to maturity, thanks to an increasingly uncertain outlook for interest rates and global growth. ETFs that invest in ultra-short bonds attracted a record $4.1 billion last week, data compiled by Bloomberg show."
A third News update, "BlackRock Blogs 'Income is Back in Bond Returns,'" quotes, "`Coupon income historically has contributed the lion's share of total returns across global fixed income markets. Yet declining yields this year elevated the role of capital appreciation in generating returns. Price appreciation made up roughly three-quarters of U.S. Treasury returns in the first quarter, we estimate. We see carry, or income, reasserting itself as the key driver of returns in bond markets in the quarters ahead, taking back the reins from price appreciation."
A fourth News brief is: "Morningstar Writes 'High-Flying High Yield, for Now.'" They comment, "`High-yield bond funds are in the news once more given this year's terrific performance run. From Jan. 1, 2019, through May 29, 2019, the high-yield bond Morningstar Category posted a 7.3% median return, while the ICE Bank of America-Merrill Lynch U.S. High Yield Index returned 7.8%. For comparison, the Bloomberg Barclays U.S. Aggregate Bond Index -- the common proxy for investment-grade intermediate-term bond funds—returned 4.3% over the same period."
Finally, a sidebar entitled, "Flows Keep Coming in '19," explains, "Bond fund inflows continued over the latest week and month, though they appear to be slowing. ICI's most recent weekly 'Combined Estimated Long-Term Fund Flows and ETF Net Issuance,' with data as of June 5, says, 'Bond funds had estimated inflows of $4.66 billion for the week, compared to estimated inflows of $3.03 billion during the previous week. Taxable bond funds saw estimated inflows of $3.23 billion, and municipal bond funds had estimated inflows of $1.43 billion.' Over the past 5 weeks, bond fund flows have totaled $21.5 billion."
It adds, "Their latest 'Trends in Mutual Fund Investing - April 2019' shows bond fund assets rising by $49.2 billion, or 1.2%, to a total of $4.319 trillion in April. Over the past 12 months through 4/30/19, bond fund assets have increased by $237.2 billion, or 5.8%. The number of bond funds fell by 7 in April to 2,155 and was up 24 from a year ago."
