Bond funds had enjoyed steady aggregate inflows through 2019, as the continuing bull market in fixed-income securities drew more investors to seek exposure. Then, in March 2020, as the global impact of the coronavirus pandemic suddenly became clear, the bond market descended into turmoil as investors rushed to turn their holdings into cash. Billions flowed out of all kinds of fixed income funds.

In a single week, in March 2020, mutual funds and exchange traded funds that invested in bonds suffered $109bn of outflows — a new record, which was led by the highest-ever weekly outflows from both investment-grade corporate bond funds and specialist junk bond funds.

The outflows soon reversed as investors regained their faith in the relative safety of government and investment-grade corporate debt.

In 2021, demand was then boosted by fast-growing investor interest in sustainable debt — via exchange traded funds that hold bonds based on environmental, social and governance principles — and in inflation-protected securities.

Inflows to bond funds specialising in ESG investing reached $54bn in the first five months of 2021, according to Morningstar. And inflows to inflation-linked ETFs reached $32bn in the first nine months — more than double the amount they attracted in the whole of 2020.

These charts, based on global fund flow data from Refinitiv, show how demand for different types of bond fund has changed in response to the pandemic, corporate performance, and economic forecasts.

Column chart of Inflows/outflows (€bn) showing government bond funds

After being hit by the March 2020 pandemic turmoil, government bonds again fell from favour in the first quarter of this year, as investors worried about higher inflation as economies emerged from lockdown. Bondholders also expressed concern over the possible scaling back of central-bank bond-buying stimulus packages. But, as bonds’ prices fell sharply, their higher yields made them look like a better safety net — and inflows resumed.

Column chart of Inflows/ouflows (€bn) showing corporate bond funds

After a strong recovery in demand for corporate debt in mid-2020, investor sentiment has weakened in 2021 over concerns that inflation will push down prices and push up yields. As the FT reported in late September, so-called spreads on corporate bonds — the extra yield they offer compared with safe government bonds — are close to their narrowest levels on record. That reduces the scope for them to narrow further and soften the blow of higher government yields.

Column chart of Inflows/outlfows (€bn) showing high-yield bond funds

After the March 2020 sell-off, high-yield — or junk — bonds were seen by many investors as a shelter from the relative volatility in equity and government bond markets. But these riskier holdings started to look less attractive as inflation fears rose, suggesting an end to the rally seen after the big pandemic outflows.

Column chart of Inflows/outflows (€bn) showing inflation-linked bond funds

Money poured into inflation-protected government bonds in the first half of this year, amid expectations of higher commodity and consumer prices. In the US, this buying activity lifted the returns from inflation-linked bonds above returns from other types of US debt security. US Treasury Inflation-Protected Securities — bonds that compensate investors for rising prices — generated returns including interest payments of 3.9 per cent in the year to August. By contrast, even high-yield junk bonds had returned only 3.6 per cent.

Column chart of Inflows/outflows (€bn) showing emerging market bond funds

At the start of 2021, it seemed that emerging market bonds were back in fashion, boosted by hopes of Covid vaccine rollouts and a new trade-friendly US administration. But, more recently, analysts have forecast weaker growth in emerging markets due to the Covid Delta variant, a lack of vaccine supplies, and constraints on government spending in the region.

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