Global debt flows: De-risking in Govies seen, but still long duration

Risk assets have managed to command decent excess returns over the risk free rate YTD, and are being cushioned by a likely Fed easing policy that is seen to be anticipatory. This (plus inflation fund outflows) encapsulates the essence of the current market discount, one that in many circles incorporates excess return over (non-US) negative risk free rates as a first phase target.

Six things learnt from the latest flows data

1)       We identify the market-place as being long duration based off a strikingly large build in longs in duration in the past quarter. Inflow to government long end funds shows this, marked by a 6.5% inflow there.

2)       There have been some long end outflows seen in the past couple of weeks, but not dramatic. Moderate de-risking in duration space contracts with ongoing risk building on corporate space, albeit at a slower pace.

3)       A recent spike in HY inflows has been mostly driven by an expected resumption of the European Central Bank’s (ECB) corporate sector purchase programme (CSPP). Risks that could come from a rise in default rates from recession is being contained by likely precautionary action from the Fed.

4)       Meanwhile, inflation funds continue to see outflows. The biggest outflow has been from US inflation funds, while W Europe money funds outflows contrast with US money fund inflows.

5)       In EM, we maintain a preference for local currency over hard currency in an environment where the Fed is on the cusp of cutting rates. This provides breathing space for EM central banks, to either cut rates or not be under pressure to hike rates (from a rates differential perspective).

6)       Latest data confirm ongoing inflows to EM, with hard currency funds seeing the bulk of the inflows. But local currency funds are no longer seeing outflows, and are now outperforming hard currency funds in terms of total returns.