Taxable Fixed Income Funds Log Largest Weekly Outflow of 2023

During LSEG Lipper’s fund-flow week that ended September 27, 2023, investors were overall net redeemers of fund assets (including both conventional funds and ETFs) for the second straight week, removing a net $16.5 billion.

Equity funds (-$9.1 billion, -2.78%), taxable bond funds (-$3.9 billion, -1.12%), tax-exempt bond funds (-$1.4 billion, -1.62%), commodities funds (-$1.2 billion, -2.31%), alternative investment funds (-$992 million, +0.35%), and mixed-assets funds (-$635 million, -2.27%) all suffered outflows over the week. Money market funds (+$633 million, +0.10%) were the only asset type to attract new capital.

Index Performance

At the close of LSEG Lipper’s fund-flows week, U.S. broad-based equity indices reported negative returns—the Russell 2000 (-1.72%), Nasdaq (-2.79%), DJIA (-2.59%), and S&P 500 (-2.90%) were all in the red. The Russell 2000 has reported weekly losses in nine of the last 10 weeks.

The Bloomberg Municipal Bond Total Return Index (-2.18%) recorded its eighth sub-zero return in nine weeks. The Bloomberg U.S. Aggregate Bond Total Return Index (-1.47%) logged its third weekly loss in four weeks.

Overseas indices traded down—Nikkei 225 (-2.79%), FTSE 100 (-3.88%), DAX (-5.45%), and Shanghai Composite (-0.19%) were all in negative territory.

Rates/Yields

The 10-2 Treasury yield spread has remained negative (-0.53) for more than one year. The 10-year and 30-year Treasury yields rose over the week (+5.40% and +6.82%, respectively).

According to Freddie Mac, the 30-year fixed-rate average (FRM) rose for the third straight week—the weekly average is currently at 7.31%—marking the highest level since 2000. Both the United States Dollar Index (DXY),+1.43%) and VIX (+16.90%) increased over the course of the week.

The CME FedWatch Tool currently has the likelihood of the Federal Reserve increasing interest rates by 25 basis points (bps) at 19.4%. This tool forecasted a 50.9% possibility of the same hike one month ago. The next meeting is scheduled for November 1, 2023.

Market Recap

Our fund-flow week kicked off on Thursday, September 21, as the Federal Reserve ended its two-day policy meeting. The central bank left rates unchanged for the second time this year. Fed Chair Jerome Powell said,

“The fact that we’ve come this far lets us really proceed carefully.”

The median projection for the federal funds rate at year-end was 5.60%, which means one more hike. The median forecast for rates at the end of 2025 increased from 3.9% to 3.4%, indicating rates may be higher for longer. Powell also noted during his speech,

“In terms of inflation, you are seeing the last three readings are very good readings. If the economy comes in stronger than expected that just means we’ll have to do more in terms of monetary policy to get back to 2%, because we will get back to 2%.”

Weekly jobless claims fell by 20,000 to 201,000, as the number of Americans filing new claims dropped to an eight-month low. The National Association of Realtors said existing home sales fell 0.7% last month, with inventory falling 14.1% from last year—the lowest record for any August. Equity markets fell as longer-dated Treasury yields rose—10-year yield jumped 2.63% on the day.

On Friday, September 22, equity markets posted their fourth straight daily loss—Nasdaq (-1.82%), S&P 500 (-1.64%), Russell 2000 (-1.56%), and DJIA (-1.08%) were all down. Treasury yields also fell across the board—two- and 10-year yields fell (-0.66% and -1.25%, respectively). S&P Global published its U.S. Composite PMI report detailing broad stagnation in output as manufacturers and service providers pointed to muted demand conditions. New orders dropped at the highest pace this year as manufacturers also reported a drop in new sales. The headline reading for the S&P Global Flash U.S. PMI Composite Output Index fell month over month for the fourth straight month.

On Monday, September 25, tensions rose in Washington as some Republicans are still holding off on passing a stopgap spending bill—current funding for federal operations will end on October 1. The Writers Guild of America and Hollywood studios have reached a tentative agreement over the weekend that looks to end the writers’ strike which has been going on since May. In Detroit, however, the United Auto Workers are still at odds with the automakers. Equity markets ended the day in the black—the Nasdaq (+0.45%), Russell 2000 (+0.44%), S&P 500 (+0.40%), and DJIA (+0.13%) were all in the black.

On Tuesday, September 26, the U.S. consumer confidence index fell to 103.0 for September, marking the lowest level in four months. The Conference Board reported that confidence was weighted down by worries of higher prices and a potential future recession. The Department of Commerce reported that new home sales dropped 8.7% in August after reaching a 17-month high in July. Year-over-year new home sales increased 5.8%. The 30-year Treasury yield increased 0.41% on the day as equity markets fell for the fifth day in six, led by the Nasdaq (-1.57%).

Our fund-flow week wrapped up Wednesday, September 27, with the Department of Commerce showing orders for long-lasting U.S. manufactured goods improved in August. Durable goods inventories increased 0.2%, with unfilled orders rising 0.4%. The Institute for Supply Management’s manufacturing PMI fell again for the tenth consecutive month. The Mortgage Brokers Association reported a decline of 1.3% week over week in mortgage applications following a 5.4% increase from the prior week. Broad-based U.S. equity markets traded mainly positive—the Russell 2000 (+0.98%), Nasdaq (+0.22%), S&P 500 (+0.02%), and DJIA (-0.20%) were all up. Treasury yields increased across the board.

Exchange-Traded Equity Funds

Exchange-traded equity funds recorded $2.3 billion in weekly net outflows, marking the third weekly outflow in four. The macro-group posted a 2.7% loss on the week, its fourth consecutive week in the red and third largest weekly loss of the year.

Sector equity ETFs (-$3.9 billion), developed international markets ETFs (-$1.1 billion), and multi-cap ETFs (-$1.1 billion) suffered the largest weekly outflows under equity ETFs. Sector equity ETFs witnessed their largest weekly outflow since the fund-flow week ending June 22, 2022. The subgroup has realized four straight weeks of outflows paired with four straight weeks of negative returns.

Large-cap ETFs (+4.0 billion), small-cap ETFs (+$1.2 billion), and equity income ETFs (+$21 million) attracted the only inflows among the equity ETF subgroups. Large-cap ETFs reported their second weekly inflow in three, despite suffering four consecutive weeks of sub-zero returns.

All 10 subgroups saw negative returns over the week.

Over the past fund-flows week, the top two equity ETF flow attractors were SPDR S&P 500 ETF Trust (ASX:SPY) (SPY, +$11.0 billion) and iShares Russell 1000 Growth ETF (NYSE:IWF) (IWF, +$727 million).

Meanwhile, the bottom two equity ETFs in terms of weekly outflows were iShares Core S&P 500 ETF (NYSE:IVV) (IVV, -$6.3 billion) and SPDR Dow Jones Industrial Average (NYSE:DIA) ETF Trust (DIA, -$508 million).

Exchange-Traded Fixed Income Funds

Exchange-traded taxable fixed-income funds observed a $778 million weekly outflow—the macro-group’s first weekly outflow in three. Fixed-income ETFs reported a weekly return of negative 1.15% on average, their third week in the red over the last four.

High-yield ETFs (-$1.9 billion), general domestic taxable fixed-income ETFs (-$1.3 billion), and emerging markets debt ETFs (-$480 million) were the top three subgroups to see net outflows. High-yield ETFs logged their largest weekly outflow since February of this year as they posted back-to-back weeks of losses and outflows.

Short/intermediate government & Treasury ETFs (+$1.5 billion), government & Treasury ETFs (+$922 million), and short/intermediate investment-grade ETFs (+$527 million) were the largest attractors of new capital under taxable bond ETFs. Short/intermediate government & Treasury ETFs have reported weekly inflows in seven of the last eight weeks despite two consecutive weeks of negative returns.

Municipal bond ETFs reported a $28 million inflow over the week, marking their third straight weekly inflow. The subgroup realized a negative 1.38% return—the third consecutive week of losses.

iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) (TLT, +$656 million) and iShares 1-3 Year Treasury Bond ETF (BMV:SHY) (SHY, +$501 million) attracted the largest amounts of weekly net new money for taxable fixed income ETFs.

On the other hand, iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE:LQD) (LQD, -$1.5 billion) and iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ:EMB) (EMB, -$506 million) suffered the largest weekly outflows under all taxable fixed income ETFs.

Conventional Equity Funds

Conventional equity funds (ex-ETFs) witnessed weekly outflows (-$6.8 billion) for the sixty-third straight week. Conventional equity funds posted a weekly return of negative 2.8%, the fourth consecutive week of losses.

Developed international markets funds (-$1.8 billion), emerging markets equity funds (-$1.1 billion), and small-cap funds (-$1.1 billion) were the top conventional equity fund subgroups to realize weekly outflows. Developed international markets funds have suffered three straight weeks of outflows while realizing their largest outflow since the first week of this year.

Large-cap funds (+$72 million) were the only subgroup to post weekly inflows. Over the past 100 weeks, this subgroup has only recorded five weeks of net inflows. Large-cap funds have realized negative returns in four consecutive weeks.

Conventional Fixed Income Funds

Conventional taxable-fixed income funds realized a weekly outflow of $3.1 billion—marking their third straight weekly outflow. The macro-group logged a negative 1.1% on average—their third weekly loss in four.

Short/intermediate investment-grade funds (-$963 million), general domestic taxable fixed income funds (-$707 million), and high yield funds (-$657 million) suffered the top outflows among conventional taxable fixed income subgroups over the trailing week. Short/intermediate investment grade funds have seen seven weekly outflows in the last eight weeks along with seeing three weeks of sub-zero returns over the previous four.

No conventional taxable fixed-income fund subgroup reported inflows over this Lipper fund-flows week.

Municipal bond conventional funds (ex-ETFs) returned a negative 1.7% over the fund-flow week—their third weekly loss in as many weeks. The subgroup experienced a $1.4 billion outflow, marking the eighth straight weekly outflow and the third largest of the year.