27 September 2019

Global debt flows: Added exposure to duration and spread

A notable underpinning in the past number of months has been an increased allocation to USD-denominated bonds. This is thematic in developed markets, has acted as a USD FX support, and is acting to keep USD rates & spread under wraps. It is also thematic in emerging markets where hard currency remains favoured over local currency (from a flows perspective)

Executive summary

Six things learnt from latest flows data

1)       We note decent flows into long end government funds, and the polar opposite on the front end. So the market has been getting long duration. We also note the increased allocation to US bonds over the past year.

2)       In inflation space, inflows to USD funds continue, in part a reverse of a prior exodus, while European inflation funds have yet to see a material reversal of prior outflows.

3)       In corporate bonds, a strong inflow to belly funds has been a feature of recent months. Inflows to corporate high yield remains firm, albeit not in the past week. Professionals have been the bigger buyers, in excess of pure retail.

4)       Emerging markets local currency has been outperforming hard currency for a change this month. This gels with some resumed inflows into local currency, even though the inflows to hard currency remain more impressive.

5)       Professional players have been the dominant buyers of emerging markets in the past few month, and in fact retail have been set sellers of local currency bonds in the past month.

6)       Changes in global allocations are mostly reflective of relative stresses, with reductions in allocations to Turkey, S Africa and Argentina impactful. Less of these direct stresses in Asia see a steadier allocation there.

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