Investors Flock to Money Market Funds and Taxable Bond ETFs

Investors were net purchasers of fund assets (including those of conventional funds and ETFs) for the fourth week in a row, injecting a net $4.6 billion for the LSEG Lipper fund-flows week ended Wednesday, May 17. Fund investors were net purchasers of money market funds (+$10.4 billion) and taxable bond funds (+$1.3 million) while being net redeemers of equity funds (-$7.0 billion) and tax-exempt fixed income funds (-$187 million) for the week.

Market Wrap-Up

Despite continued concerns with the debt ceiling impasse and mixed signals from the Federal Reserve Board on future rate hikes, investors remained generally engaged during the fund-flows week—at least from a performance point of view.

On the domestic equity side of the equation, investors became slightly more risk averse for the week after Treasury Secretary Janet Yellen reiterated her concerns that the U.S. may not be able to pay all its bills as early as June 1 if the debt ceiling is not increased. Nonetheless, the Nasdaq Composite (+1.58%) easily stayed in the black, posting the strongest return of the broad-based U.S. indices, followed by the Russell 2000 (+0.85%) and the S&P 500 (+0.51%). The Dow Jones Industrial Average (-0.33%) was the laggard of the group. Overseas, the Nikkei 225 (+1.08%) posted the only plus-side returns of the often-followed broad-based international indices. Meanwhile, the Xetra DAX Total Return Index (-1.04%), the FTSE 100 (-1.42%), and the Shanghai Composite (-2.13%) posted losses for the flows week.

For the fund-flows week, the Morningstar LSTA U.S. Leveraged Loan Index (-0.06%) mitigated losses better than the Bloomberg Municipal Bond Index (-0.42%) and the Bloomberg U.S. Aggregate Bond Index (-0.85%). The 10-year Treasury yield rose 14 basis points (bps) for the week, settling at 3.57%, while the two-year Treasury yield rose 22 bps to close out the flows week at 4.12%. The U.S. Treasury yield curve remained inverted, with the two- and 10-year Treasury yield spread (-55 bps) widening eight bps for the week.

On Thursday, May 11, the Dow witnessed its fourth consecutive decline after Disney (DIS) announced that it lost four million subscribers in Q1 and PacWest Bancorp (PACW) reported a 9% decline in deposits in recent weeks, weighing on regional bank stocks. In other news, while the April Producer Price Index showed a lower-than-expected growth in wholesale prices, persistent service price increases weren’t slowing inflation fast enough for the markets. Keeping investors on guard for the day, Minneapolis Fed President Neel Kashkari said he’d support more interest rate hikes from the Fed until inflation returns to the central bank’s 2% target—contrary to Fed Chair Jerome Powell’s hint that the Fed might be able to pause its interest-rate hike campaign after its most recent interest rate hike.

The Dow and S&P 500 booked back-to-back weekly losses on Friday, May 12, after a poor consumer sentiment report reignited concerns of a nascent recession. The University of Michigan’s May consumer sentiment preliminary index reading dropped to 57.7 from April’s 63.5, posting its lowest value since November. Fanning recessionary concerns, investors also reacted to Thursday’s first-time jobless claims for the week prior, which rose by 22,000 to 264,000—its highest level since October 2021.

The Dow snapped its five-session slide on Monday, May 15, as investors kept a keen eye on efforts to resolve the U.S. debt-ceiling standoff. While President Joe Biden told reporters that he remains optimistic and “there is a desire on their part as well as ours to reach an agreement,” House Speaker Kevin McCarthy said congressional Republicans remained “far apart.”  In other news, the New York Fed’s Empire State business-condition index plummeted 42.6 points in May to a negative 31.8, indicating that manufacturing activity in the state is deteriorating.  However, breathing a little life back into the markets, Atlanta Federal Reserve Bank President, Raphael Bostic, said that he would like to see the central bank pause its cycle of rate hikes to gauge the health of the economy.

The Dow finished 339 points lower on Tuesday, May 16, falling on a weaker-than-expected retail sales figure and a disappointing outlook from retailer Home Depot (NYSE:HD). However, adding more angst to the day, Treasury Secretary Yellen repeated June 1 as the date when the Treasury may be unable to pay its bills, stating the U.S. economy “hangs in the balance” without a deal to raise the country’s borrowing limit. A weaker-than-expected April retail sales of 0.4% weighed on investors’ psyche as well, missing analyst expectations of a 0.8% increase.

On Wednesday, May 17, U.S. stocks ended higher as optimism about a potential debt-ceiling deal and a bounce in regional banks buoyed the markets. President Biden said, “I am confident that we’ll get the agreement on the budget, and America will not default.” After their discussion on Tuesday, House Speaker McCarthy told CNBC news early on Wednesday that he doesn’t think the U.S. will default on its debt. In other news, construction on new homes rose 2.2% in April and housing starts rose to a 1.4 million annual pace in April from 1.37 million the month before.

Exchange-Traded Equity Funds

Equity ETFs experienced net outflows for the second week in three, handing back a little less than $3.4 billion for the most recent fund-flows week. Authorized participants (APs) were net sellers of domestic equity ETFs (-$3.6 billion), withdrawing money also for the second week in three, while nondomestic equity ETFs witnessed their second consecutive week of net inflows, taking in $273 million this past week. Sector-technology ETFs (+$866 million) observed the largest net inflows of the equity ETF macro-groups for the fund-flows week, followed by international equity ETFs (+$483 million) and equity income ETFs (+$441 million). Meanwhile, large-cap ETFs (-$2.1 billion) suffered the largest net outflows, bettered by the commodities heavy sector-other ETFs (-$789 billion) and sector-energy ETFs (-$525 million).

SPDR S&P 500 (NYSE:SPY) (SPY, +$2.5 billion) and JPMorgan (NYSE:JPM) Equity Premium Income ETF (JEPI, +$481 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, Invesco QQQ Trust 1 (QQQ, -$2.7 billion) experienced the largest individual net redemptions and iShares Core S&P 500 ETF (IVV, -$2.6 billion) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the second consecutive week, taxable fixed income ETFs witnessed net inflows, attracting $2.4 billion this week. APs were net purchasers of corporate investment-grade debt ETFs (+$2.0 billion), government-Treasury ETFs (+$694 million), and flexible ETFs (+$359 million) while being net redeemers of corporate high-yield ETFs (-$1.3 billion) and corporate investment-grade debt ETFs (-$256 million).

iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD, +$1.1 billion), Schwab Short Term US Treasury ETF (SCHO, +$967 million), and iShares 1-3 Year Treasury Bond ETF (SHY, +$713 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, iShares Short Treasury Bond ETF (SHV, -$3.0 billion) and iShares iBoxx $ High Yield Corporate Bond ETF (HYG, -$645 million) handed back the largest individual net redemptions for the week.

For the second week in three, municipal bond ETFs experienced net outflows, handing back $115 million this week. JPMorgan Ultra-Short Municipal Income ETF (JMST, +$88 million) witnessed the largest draw of net new money of the municipal bond ETFs, while iShares National Muni Bond ETF (MUB, -$181 million) experienced the largest net redemptions in the subgroup.

Conventional Equity Funds

Conventional fund (ex-ETF) investors were net sellers of equity funds for the sixty-seventh week in a row—redeeming $3.7 billion—with the macro-group posting a 0.35% market gain for the fund-flows week. Domestic equity funds—suffering net redemptions of slightly less than $3.5 billion—witnessed their twentieth consecutive week of net outflows while posting a 0.54% market advance on average for the fund-flows week. Nondomestic equity funds—posting a 0.10% weekly market loss on average—observed their thirteenth week of net outflows in a row, handing back slightly less than $188 million this week.

On the domestic equity side, fund investors were net redeemers of large-cap funds (-$1.7 billion) and small-cap funds (-$1.0 million). Investors on the nondomestic equity side were net redeemers of global equity funds (-$545 million) while being net purchasers of international equity funds (+$357 million) for the week.

Conventional Fixed Income Funds

For the thirteenth week in a row, taxable bond funds (ex-ETFs) witnessed net outflows—handing back $1.1 billion this past week—while posting a 0.53% market loss on average for the fund-flows week. The corporate investment-grade debt fund macro-group attracted the largest draw of net money for the week, taking in $142 million, followed by government-mortgage funds (+$83 million) and corporate high-quality funds (+$44 million). Balanced funds (-$414 million) suffered the largest net redemptions, bettered by corporate high-yield funds (-$323 million) and government-Treasury funds (-$307 million).

The municipal bond funds group posted a 0.35% market loss on average during the fund-flows week (their first weekly market decline in four) and witnessed net outflows for the thirteenth straight week, handing back $72 million this week. Short Municipal Debt Funds (-$178 million) suffered the largest net outflows of the macro-group, bettered by Short/Intermediate Municipal Debt Funds (-$175 million) and High Yield Municipal Debt Funds (-$58 million), while General & Insured Municipal Debt Funds (+$363 million) witnessed the largest weekly net inflows of the macro-group.

Money Market Funds

Given the rise in concerns for the U.S. debt-ceiling staredown, it wasn’t too surprising to see money market funds (+$10.5 billion) witness their fourth consecutive weekly net inflows. Money Market Instrument Funds (+$6.1 billion) took in the largest draw of net new money for the week, followed by Institutional U.S. Treasury Money Market Funds (+$3.0 billion), U.S. Treasury Money Market Funds (+$2.4 billion), and U.S. Government Money Market Funds (+$1.5 billion). Meanwhile, Institutional U.S. Government Money Market Funds (-$1.3 billion) and Institutional Money Market Funds (-$1.2 billion) suffered net redemptions.