Investors Flee to Fixed Income

Note: This is an excerpt from the Morningstar Direct U.S. Asset Flows Commentary for July 2019. The full report can be downloaded here.

Long-term funds collected $26.7 billion in July, a drop from June's $46.1 billion. Net flows went overwhelmingly to taxable-bond, municipal-bond, and money market funds. Amid the first Federal Reserve rate cut since 2008, money market funds took in a robust $76 billion. They collected about $202.0 billion over the past three months alone, the strongest three-month stretch in at least 10 years.

Falling rates have accompanied the flood of money going into bond funds. Since October 2018, the yield on the 10-year Treasury bond has dropped from 3.2% to about 2.0% at the end of July 2019. (It dropped below 1.6% as of mid-August, not far from the July 2016 low.) This has fueled strong returns. The average intermediate core bond fund gained 6.0% for the year to date through July. Credit-oriented strategies have done even better since 2018's fourth-quarter sell-off, as high-yield bond funds were up 9.2% for the year to date. So, add strong returns to the other tailwind for taxable-bond demand: demographics. More baby boomers are seeking safety and income in retirement, funneling money into bond funds.

With that context in mind, taxable-bond funds absorbed about $40.2 billion in July inflows, the group's best showing since January 2018. Demand was once again broad-based across Morningstar Categories, although intermediate core bond and intermediate core-plus bond collected $12.3 billion and $9.0 billion, respectively. But high-yield bond and multisector bond funds also had healthy inflows of $4.2 billion and $3.4 billion, respectively.

It was also the best month for active taxable-bond funds since October 2012. They collected nearly $27.0 billion, more than twice the inflows ($13.3 billion) for passive taxable-bond funds. This reflects the popularity of credit-oriented strategies, which active funds tend to favor more than their passive counterparts. PIMCO Income (PIMIX) again led the way with $2.1 billion in inflows.

Other key takeaways:

• Despite positive July equity returns, U.S. equity funds had their worst outflows since June 2018.
• Money market funds took in a robust $75.7 billion. The group has collected about $202.0 billion over the past three months alone, the strongest three-month stretch in at least 10 years.
• Vanguard led all fund families with $14.9 billion in inflows, followed by State Street's $8.2 billion. BlackRock's iShares had more than $4 billion in outflows--its worst outflows since June 2018.