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Risk-averse UK investors have retreated from fixed income and bond funds as the turmoil in the bond markets on both sides of the Atlantic dented confidence.
Thirty-year gilt yields this week rose to their highest levels since the ill-fated “mini” Budget of September 2022, while the yield on 30-year US Treasuries reached a 16-year high as markets digested the possibility of higher interest rates for longer and more government borrowing.
Figures from the Investment Association show that retail investors pulled a net £356mn from fixed income funds in August. Funds network Calastone separately recorded a similar outflow of £330mn from bond funds in August, followed by a further £128mn of outflows in September.
“The bond markets are in the driving seat at the moment,” said Edward Glyn, head of global markets at Calastone. “One moment, inflation coming in better than expected or central banks hitting pause on interest rates causes a bond market rally . . . the next moment, policymakers (warn) that rates will stay high for the foreseeable future, bond yields surge and equity markets sag.”
The trend was compounded by investors continuing to seek refuge in ultra-safe money market funds, which had net inflows of £862mn across August and September, according to Calastone.
Calastone’s figures are not comprehensive but are widely seen as offering a useful snapshot of investment fund flows. They suggest that the selling pressure from UK funds continues, with £448mn of outflows in September alone, while global funds had inflows of close to £1bn.
Elsewhere retail investors continued to swing away from actively managed funds to passive index funds, particularly global equity index funds, according to Calastone figures.
Active funds recorded £7bn of retail outflows since the start of the year, while passive funds gained some £5.4bn.
“Global equity, particularly passive funds, have proved popular as an easy, instant cross-market exposure in a market where making a tactical call is tough,” said Emma Wall, head of investment analysis and research at Hargreaves Lansdown.
Among the top funds bought on Hargreaves Lansdown in August were money market vehicles such as the Royal London short term money market and Abrdn sterling money market. There were also international indices including the Legal & General US index.
Many are cautioning that a correction in the bond markets is possible in the short term, which will inevitably have an impact on equity markets.
“A renewed decline in real bond yields by itself would likely boost equities,” said Bank of America analysts in a note on European equities, with a caveat that its full impact would depend on the macroeconomic conditions behind declining bond yields.
“The likelihood is that over the course of the next 12 months, equity markets will rebalance, yields will fall and bond prices will rise,” said Wall of Hargreaves.
“It is therefore important that investors remain diversified across asset classes and geographies, so they are best placed to ride out any market scenario when it comes.”