The December issue of our Bond Fund Intelligence, which was sent to subscribers Tuesday morning, features the lead story, "OFR Annual Report Claims Vulnerabilities in Bond Funds," which reviews comments from the U.S Treasury's Office of financial Research on bond outflows during 2020; and "Fidelity Conservative Income Bond Fund's Morin, Potenza," which takes a closer look at one of the largest offerings just beyond money market funds. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund returns inched lower in November while yields moved higher. We excerpt from the new issue below. (Contact us if you'd like to see our latest Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings data.)
BFI's "OFR" piece reads, "The U.S. Treasury's Office of Financial Research published the '`OFR 2021 Annual Report to Congress' last month, which takes a close look at runs in bond funds. They write, 'Last year's financial stress precipitated widespread runs in similar cash management products with floating net asset values (NAVs), such as dollar-denominated offshore prime funds, local government investment pools, and ultra-short corporate bond mutual funds. Bond mutual funds are vulnerable in ways similar to money market funds and other cash management products because they offer daily liquidity against assets that take longer to sell in an orderly way. This makes them vulnerable to panic-driven runs, which can become worse by reducing inventories of less liquid, over-the-counter (OTC) securities used by dealers to maintain orderly buying and selling."
The OFR report continues, "Bond funds, including open-ended funds and exchange-traded funds (ETFs), supplied more than $6 trillion in funding as of year-end 2020. In 2008, open-ended funds contributed about 6% of credit provided, compared to 7% from depository institutions. At year-end 2020, their shares were about 12% and 9%, respectively."
The Fidelity article states, "Last month, Fidelity Investments hosted a webinar entitled, 'Fidelity Conservative Income Bond Fund and the Markets,' which featured Fidelity's Michael Morin, head of Fidelity Institutional Liquidity Management and CIB Portfolio Manager Julian Potenza. They discussed the latest strategies for Fidelity's offering just beyond money market funds and the overall ultra-short bond fund market."
Morin explains, "We designed the fund during the first zero interest rate policy period, and we spent a lot of time and energy with our quantitative team asking ourselves, 'How would this fund perform through market cycles?' We knew we were going to start off at a zero-interest rate environment, which is where we are today, and [then] would be in a rising rate environment."
He continues, "The goal really was to design a risk-return profile just outside of prime money market funds that would be both attractive to money market investors who wanted to take on a little bit more risk with a potential higher return, as well as to attract fixed income investors who are maybe out the curve. [These investors say], 'Gee, eventually the Fed is going to tighten, and in a rising rate environment ... I should lower duration.' This fund was designed to be one of the lowest duration bond funds in the marketplace.... What I will say is we have very tight guidelines on this portfolio, both from a credit perspective and an interest rate sensitivity perspective."
Our first News brief, "Returns Inch Lower, Yields Rise in Nov.," states, "Bond fund yields moved higher while returns inched lower last month. Our BFI Total Index declined by 0.01% for 1-month but rose 1.28% over 12 months. The BFI 100 returned 0.02% in Nov. and 1.23% over 1-year. Our BFI Conservative Ultra-Short Index was down 0.07% for 1-month but up 0.08% for 1-yr; Ultra-Shorts declined 0.13% and rose 0.46%, respectively. Short-Term decreased 0.20% but rose 0.74%, and Intm-Term rose 0.06% in Nov. and rose 0.33% over 1-year. BFI's Long-Term Index rose 0.23% in Nov. but fell 0.05% over 1-year. Our High Yield Index fell 0.72% in Nov. but gained 4.99% over 1-year."
Another News brief, entitled, "Barron's: Ultra-Shorts Trail MMFs," quotes the article, "Stashing Your Money Under a Mattress Doesn't Look So Bad Compared to Bond Funds." It tells us, "[T]he recent returns of some ultrashort-term bond funds ... despite their minimal risk ... have managed to shrink your investment.... Consider the JPMorgan Ultra Short Income ETF (JPST). The $18 billion fund returned negative 0.11% for the past month and negative 0.26% for the past 3 months.... That's actually better than some rivals, such as the Pimco Enhanced Short Maturity Active ETF (MINT).... BlackRock Ultra Short-Term Bond ETF (ICSH) fared only a bit better -- or less badly -- slipping 0.07% in the past month and dipping 0.08% for the past 3 months."
A third News brief, "Reuters on Record Inflows Into Bond Funds," writes, "U.S. bond funds have attracted record inflows this year, despite worries about inflation and expectations the Federal Reserve could roll back its pandemic-era stimulus measures earlier. According to Refinitiv Lipper data, U.S. bond funds attracted a net $612 billion in the first eleven months of this year, already surpassing the record inflow of $486.18 billion recorded in 2019."
A BFI sidebar, "BIS Hits Bond Funds on Risk," quotes the Bank for International Settlements' BIS Quarterly Review piece, "Open-ended bond funds: systemic risks and policy implications." It tells us, "[O]pen-ended funds that invest in bonds ... have grown rapidly over the past two decades. Besides their size, their business model and role in recent events suggest that bond OEFs can amplify stress in financial markets. The March 2020 market turmoil tested the effectiveness of bond OEFs' tools in dealing with large investor redemptions in the presence of liquidity mismatches. Their tools notwithstanding, bond OEFs had to liquidate assets on an elevated scale, thus collectively adding to bond market pressures."
Finally, another sidebar, "Bond ETFs Break $1.2 Trillion," tells readers, "Bond fund assets inched up to $5.6 trillion and bond ETFs broke over the $1.2 trillion level last month, but outflows have appeared in recent weeks. ICI's 'Combined Estimated Long-Term Fund Flows and ETF Net Issuance,' comments, "Bond funds had estimated outflows of $4.51 billion for the week, compared to estimated inflows of $2.90 billion during the previous week. Taxable bond funds saw estimated outflows of $5.03 billion, and municipal bond funds had estimated inflows of $518 million.' Over the past 5 weeks, bond funds and bond ETFs have seen inflows of $34.9 billion."
