Global debt flows: A reflective mood in risk assets

Flows into investment grade corporates remain convincing though. And outflows from government bonds are still thematic too, although in the past week there were some inflows into long dated governments. There is still on aggregate risk buying happening, but a period of reflection can also be gleaned from latest data.

Six things learnt from latest flows data

1)    Emerging markets are in a better shape than they were a couple of months back, but even given return inflows, emerging markets have not quite made a convincing escape velocity from the Covid-19 driven crisis.

2)    That said, inflows to hard currency remain a positive development. Local currency funds, though, continue to struggle to attract material inflows. The bulk of the performance and inflows have been in hard currency emerging markets.

3)    Default risk remains elevated and will become more acute beyond September when most of the Fed’s support facilities are due to be taken off the shelf. These concerns are reflected in more cautious flows into high yield in more recent weeks.

4)    Core yields remain hammered down, but this reflects a combination of expectations and central bank buying rather than investor inflows. There were long end inflows in the past week, but outflows have dominated in the past month.

5)    In contrast, the dominant theme in corporates has been strong inflows. Elevated primary issuance remains a factor here, as inflows are registered, as issuance exceeds redemptions - which it currently does; comfortably.

6)    Interesting to note return flows into inflation linked funds; a pure relative value impact we think. And some outflows from the safety of money market funds.