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ARCHIVE
Debunking Assumptions About Bond Mutual Funds’ Flows and Bond Sales
By Shelly Antoniewicz
December 20, 2018
Recent outflows from bond mutual funds have drawn press attention and revived concerns among regulators about the impact of bond fund investors’ actions on the broader bond market. Unfortunately, this attention is rooted in misconceptions—as we’ll show using ICI’s comprehensive data covering 98 percent of mutual fund industry assets.
Are the Recent Outflows the Largest Ever from Bond Mutual Funds? No
No. Not in absolute dollar amount nor, most importantly, as a percentage of bond mutual fund assets.
Based on ICI’s weekly mutual fund flows report published December 19, bond mutual funds have had 10 consecutive weeks of outflows, totaling an estimated $79 billion dollars. Such numbers naturally draw attention, especially when they’re reported without any context. But when put in the appropriate context—the outflows’ share of the total assets in bond mutual funds—the numbers lose much of their click-bait appeal.
As Figure 1 shows, the recent $79 billion outflow represents just 1.9 percent of the $4.2 trillion in bond mutual funds as of September 2018 (before the start of the outflows). In addition, bond mutual funds had multiple weeks of sustained outflows in other periods (2008, 2013, 2015, and 2016). What’s noticeable is that in each of these periods, the cumulative outflows amounted to a small share of bond fund assets. Even during the longest and largest period of outflows from bond mutual funds (31 weeks from June 5 to December 31, 2013), the $168 billion in outflows represented only 4.8 percent of bond fund assets at the time.
Focusing on outflows in dollar terms fuels stories—and regulator concerns—about investors “fleeing” bond funds, with associated hand-wringing about funds’ liquidity, “first mover” advantages, and “runs.” But isn’t the bigger story here the fact that investors decided to keep 98 percent of bond mutual fund assets invested as they ride out a bumpy market because these investors have long-term goals that bond funds help them achieve?
Figure 1
Redemptions from Bond Mutual Funds Are a Small Share of Bond Fund Assets
Period of net redemptions |
Cumulative outflow |
Percentage of total net assets1 |
6/5/2013–12/31/20132 |
-$168 |
-4.8% |
9/18/2008–12/17/2008 |
-$73 |
-4.2% |
10/10/2018–12/12/2018 |
-$79 |
-1.9% |
7/29/2015–10/7/2015 |
-$56 |
-1.6% |
11/11/2015–2/13/2016 |
-$43 |
-1.2% |
1 Cumulative outflow over the period as a percentage of bond mutual fund assets at the month-end prior to the start of the period of net redemptions.
2 Data contain two one-week periods with small inflows.
Source: Investment Company Institute
Do Bond Funds Always Sell Bonds When They Have Redemptions? No
The media and regulators often presume that outflows will force bond fund managers to sell portfolio assets to meet redemptions, pushing bond prices even lower and setting up a “vicious cycle” of falling prices and further sales. We’ve shown in many contexts that these “fire sale” assumptions don’t stand up to data and evidence. The facts are that bond mutual fund managers have a variety of tools to meet redemptions—and sometimes view declines in bond prices as buying opportunities.
Recent experience reinforces that message. According to ICI’s monthly Trends in Mutual Fund Investing release, bond mutual funds in October 2018 reported outflows of $32 billion, or 0.8 percent of September bond fund assets—the first monthly aggregate outflow for bond mutual funds since December 2016. The Federal Reserve in October was indicating that monetary policy might need to be tightened more aggressively. The yield on the 10-year Treasury note, which had broken through 3 percent in September, was continuing to march upward. That, combined with the potential for a looming trade war, boosted stock market volatility.
Faced with redemption requests, were bond mutual fund managers forced to sell bonds? No.
Bond mutual funds were net buyers of bonds in October. As Figure 2 shows, despite outflows, all different types of bond funds were buying on net. For example, although investment grade and multisector bond mutual funds (Panel A) had $28 billion in outflows in October, these funds collectively purchased, on net, $12 billion in corporate bonds and $4 billion in US government bonds. Municipal bond funds (Panel B) also were net buyers of municipal bonds despite outflows. High-yield bond mutual funds (Panel C), which are often scrutinized by regulators and the financial press, purchased, on net, a small amount of corporate bonds, and their holdings of government bonds (not shown) were essentially unchanged.
Figure 2
Fire Sale? What Fire Sale?
Billions of dollars, October 2018
Source: Investment Company Institute
Bond fund managers have many ways to meet redemption requests other than selling bonds. For example, in any given month, mutual funds receive cash as the bonds they hold either pay interest or mature. These cash sources often can fulfill the vast majority of redemption requests. In addition, bond fund managers hold short-term assets or use derivatives to manage their liquidity and prepare to meet redemptions.
As noted above, outflows from bond mutual funds have continued through November and early December. We don’t yet have data on bond funds’ purchases and sales of bonds in those months—and it’s quite possible that these funds could have been net sellers. But that’s a question to be settled by data—not by the simple assumption that outflows from bond funds will immediately spill over and damage the underlying bond markets.
Shelly Antoniewicz is ICI’s senior director of industry and financial analysis.
Permalink: https://www.ici.org/viewpoints/view_18_bond_flows_purchases
TOPICS: Bond FundBondsFixed IncomeMutual Fund
Understanding Interest Rate Risk in Bond Funds
By Shelly Antoniewicz and James Duvall
December 17, 2018
Long-term interest rates reached their lowest recorded levels in July 2016 and were on a steady upward trend until early December. Rates dipped recently, but that could be short-lived if global trade tensions ease and the outlook for economic growth remains robust. Investors should be aware of the effects rising interest rates could have on their bond fund investments....
TOPICS: Bond FundBondsExchange-Traded FundsFixed IncomeIndex FundMutual Fund
Simulating a Crisis
By Sean Collins
August 15, 2017
The Bank of England (BoE) recently published a paper detailing results from a simulation intended to “stress-test” open-end investment funds. The paper suggests that under “severe but plausible” assumptions, investors could redeem so heavily from open-end investment funds (e.g., mutual funds or UCITS funds) during a period of market stress that they could cause “dislocations” in corporate bond markets.
TOPICS: Bond FundEuropeFinancial MarketsFinancial StabilityFixed IncomeFund RegulationGlobalInternationalMutual FundPolicy Research
Average Expense Ratios for Index ETFs Have Declined
By Shelly Antoniewicz, Sean Collins, James Duvall, and Morris Mitler
May 24, 2017
In yesterday’s ICI Viewpoints post, we noted that our annual report on the asset-weighted average expense ratios of funds—“Trends in the Expenses and Fees of Funds, 2016”—showed that expenses for long-term mutual funds continued to decline in 2016.
TOPICS: Bond FundEquity InvestingExchange-Traded FundsFixed IncomeIndex FundInterest RateMutual Fund
Average Expense Ratios for Long-Term Mutual Funds Continued to Decrease in 2016
By Morris Mitler and Sean Collins
May 23, 2017
ICI recently released its report on the expense ratios of mutual funds: “Trends in the Expenses and Fees of Funds, 2016.” This is ICI's first report that also summarizes expense ratios for exchange-traded funds (ETFs).
TOPICS: Bond FundEquity InvestingExchange-Traded FundsFederal ReserveFixed IncomeInterest RateMoney Market FundsMutual Fund
The Taper Tantrum—Take II
By Shelly Antoniewicz
December 13, 2016
Long-term interest rates in the United States have been on the rise since summer 2016—slowly creeping up from July through October, and then jumping after the presidential election. Thus far, the response from bond mutual fund investors has been subdued. Nevertheless, various commentators—from the vice chairman of the Federal Reserve Board to the multinational Financial Stability Board—have expressed concerns that bond fund investors may rush to redeem shares to avoid portfolio losses stemming from unexpected increases in interest rates.
TOPICS: Bond FundBondsFederal ReserveFinancial MarketsFinancial StabilityFixed IncomeFund RegulationInterest RateMutual FundTreasury
Matching Models to Reality: Bond Market Investors Don’t Follow the “First-Mover” Script
By Brian Reid
July 18, 2016
Fourth in a series of ICI Viewpoints testing the hypotheses of academics and regulators about mutual fund and investor behavior during times of market stress.
Regulators and researchers have put forward a common narrative that fund investors can destabilize markets during a period of market stress. They have advanced several hypotheses—including the concept of a first-mover advantage—to support their narrative. These hypotheses produce testable predictions about how fund investors behave in troubled markets: not only will investors redeem their fund shares but they also will stop purchasing new fund shares, thus creating large destabilizing net outflows from funds.
TOPICS: Bond FundBondsFederal ReserveFinancial MarketsFinancial StabilityFixed IncomeInterest RateMutual Fund
Matching Models to Reality: In a Falling Market, the Real “Movers” May Be...the Buyers
By Brian Reid
July 15, 2016
Third in a series of ICI Viewpoints testing the hypotheses of academics and regulators about mutual fund and investor behavior during times of market stress.
TOPICS: Bond FundBondsFederal ReserveFinancial MarketsFinancial StabilityFixed IncomeInterest RateMutual Fund
Matching Models to Reality: The Real-World Challenges to Regulators’ “First-Mover” Hypothesis
By Sean Collins
July 14, 2016
Commentators have long predicted that, one of these days, a market downturn will send U.S. mutual fund investors racing for the exits.
TOPICS: Bond FundBondsFederal ReserveFinancial StabilityFixed IncomeInterest RateMutual Fund
The Liquidity Provided by ETFs Is No Mirage
By Todd Bernhardt
June 20, 2016
The article above ignores fundamental information about ETFs, the behavior of investors, and the effects of market structure on the ETF product.
TOPICS: Bond FundBondsEquity InvestingExchange-Traded FundsFinancial MarketsFinancial StabilityFixed Income
Yes, Funds Come and Go—Without Government Help
By Todd Bernhardt
March 11, 2016
For several years now, ICI has pushed back against those advocating for bank-like regulations on the asset management industry, pointing out the numerous reasons why regulated funds or their managers are not sources of risk to the overall financial system.
TOPICS: Financial StabilityFixed IncomeFund RegulationMutual Fund
The “Waterfall Theory” of Liquidity Management Doesn’t Hold Water
By Sean Collins and Chris Plantier
March 9, 2016
In a series of recent blog posts, economists at the Federal Reserve Bank of New York have discussed new research assessing the potential for bond mutual funds to pose systemic risks.
TOPICS: Bond FundBondsFederal ReserveFinancial MarketsFinancial StabilityFixed IncomeInterest RateMutual Fund
New Research by New York Fed Confirms: Bond Funds Don’t Pose Systemic Risks
By Chris Plantier and Sean Collins
February 23, 2016
In a series of recent blog posts, economists at the Federal Reserve Bank of New York discussed results from a theoretical model assessing the potential for bond mutual funds to pose systemic risks.
TOPICS: Bond FundBondsFederal ReserveFinancial MarketsFinancial StabilityFixed IncomeInterest RateMutual Fund
Traders, Start Your Engines: After August 24, Exchanges Need to Coordinate
By Jennifer Choi and George Gilbert
November 30, 2015
The extraordinary volatility in U.S. equity markets on August 24, 2015, exposed a significant deficiency in the rules governing these markets’ structure: a lack of harmonization across securities exchanges for reopening trading after a “limit up–limit down” trading halt in a security.
TOPICS: Equity InvestingEuropeExchange-Traded FundsFinancial MarketsFinancial StabilityFixed IncomeFund Regulation
U.S. Bond ETFs Resilient on August 24
By Shelly Antoniewicz
November 20, 2015
Some observers have suggested that equity market volatility on August 24, 2015, spilled over into other markets and products, in particular to bond exchange-traded funds (see, for example, Bank of England Financial Stability Paper, no. 34, October 2015, pages 26 and 27). In our analysis of the events of that morning, we conclude that U.S. bond ETFs were resilient and largely immune to the turmoil in the equity markets.
TOPICS: Bond FundBondsEquity InvestingEuropeExchange-Traded FundsFinancial MarketsFinancial StabilityFixed IncomeFund Regulation
The Wall Street Journal’s Dangerous Disservice to Investors
By Mike McNamee
September 22, 2015
For 75 years, mutual funds have successfully met their regulatory obligation to fulfill redemption requests within seven days, meeting investor demands and delivering on their investment objectives through good markets and bad.
Yet the Wall Street Journal seems determined to ignore this established history and the circumstances surrounding it. It has created a liquidity “measure” of its own devising—a test that no regulator has endorsed and no informed market participant would credit. The newspaper uses its self-invented process to imply that bond mutual funds are “pushing the limits” of Securities and Exchange Commission (SEC) guidelines governing fund liquidity.
TOPICS: Bond FundBondsEquity InvestingExchange-Traded FundsFinancial MarketsFinancial StabilityFixed IncomeFund GovernanceFund RegulationMutual Fund
New York Times Paints False Picture of Funds’ Emerging Market Investments
By Mike McNamee
August 24, 2015
With the global market turmoil over the past week, it’s no surprise that journalists are looking for hot stories of panic, investor flight, and impending crisis. Either they believe that investors are inherently flighty and panic-prone, or they believe that “this time is different” and investors who have not panicked before will panic now.
TOPICS: Bond FundBondsEquity InvestingEuropeFinancial MarketsFinancial StabilityFixed IncomeICI GlobalInternationalMutual Fund
Federal Reserve Reverse Repo Facility Helps Stabilize Short-Term Money Markets
By Chris Plantier
April 17, 2015
Following a pattern observed at the end of recent quarters, money market fund holdings of European issuers dropped at the end of March, although the decline was not as large as the previous quarter, ending December 2014. As we have noted before, for regulatory reasons European banks have been paring their balance sheets at the end of each quarter, resulting in a temporary decline in their desire to borrow from money market funds.
TOPICS: BondsEuropeFederal ReserveFinancial MarketsFixed IncomeFund RegulationInvestment EducationMoney Market FundsTreasury
More Unfounded Speculation on Bond ETFs and Financial Stability
By Shelly Antoniewicz and Mike McNamee
April 13, 2015
A recent column in the Financial Times warns of “another accident in waiting” in the growth of fixed-income exchange-traded funds (ETFs)—described as “financial alchemy” that converts illiquid bonds into “baskets” that “trade moment to moment on the stock exchanges.” This “illusory” ETF liquidity will disappear, the author warns, when investors “want to move en masse, and quickly, when the going gets less good.”
TOPICS: Bond FundBondsExchange-Traded FundsFinancial MarketsFinancial StabilityFixed IncomeInterest RateTrading
Why Long-Term Fund Flows Aren’t a Systemic Risk: Multi-Sector Review Shows the Same Result
By Sean Collins
March 4, 2015
In a recent blog post discussing why we believe flows from long-term mutual funds do not pose risk to the financial system, we posted a chart showing that outflows from bond funds are modest even during periods of stress in the financial markets.
TOPICS: Bond FundBondsFinancial MarketsFinancial StabilityFixed IncomeInvestor ResearchMutual Fund
Simple Answers to the Federal Reserve’s Quandaries
By Mike McNamee
February 24, 2015
The Federal Reserve System can’t get past its perplexities on the role of mutual funds in financial stability. Time and again, the Fed’s governors, regional presidents, and staff return to the same hypothetical risks and speculative scenarios in which mutual funds somehow pose a threat to the financial system.
TOPICS: Bond FundBondsExchange-Traded FundsFederal ReserveFinancial MarketsFinancial StabilityFixed IncomeMutual Fund
Why Long-Term Fund Flows Aren’t a Systemic Risk: Understanding the Data on Institutional and Retail Investors
By Sean Collins
February 20, 2015
In two previous ICI Viewpoints posts, I discussed the muted response of investors in long-term funds―which invest primarily in stocks, bonds, or both―to financial stresses, and examined some of the characteristics of funds and their investors that help explain that muted response.
TOPICS: Bond FundBondsFinancial MarketsFinancial StabilityFixed IncomeInvestor ResearchMutual Fund
Why Long-Term Fund Flows Aren’t a Systemic Risk: Plus Ça Change, Plus C’est La Même Chose
By Sean Collins
February 19, 2015
As discussed in a previous ICI Viewpoints post, regulators and others have voiced concerns that long-term funds―funds that invest primarily in stocks, bonds, or both―might experience large outflows during a financial crisis, adding pressure on financial markets.
TOPICS: Bond FundBondsFinancial MarketsFinancial StabilityFixed IncomeInvestor ResearchMutual Fund
Why Long-Term Fund Flows Aren’t a Systemic Risk: Past Is Prologue
By Sean Collins
February 18, 2015
A recent Brookings Institution conference on Asset Management, Financial Stability, and Economic Growth aired the “active policy debate on how to regulate asset managers to maximize economic growth without endangering financial stability.”
TOPICS: Bond FundBondsFinancial MarketsFinancial StabilityFixed IncomeInvestor ResearchMutual Fund
Happy Birthday ERISA! Congratulations on 40 Years
By Sarah Holden and Elena Barone Chism
September 2, 2014
Today marks the 40th birthday of the Employee Retirement Income Security Act (ERISA). Signed into law on September 2, 1974, ERISA introduced bold steps to safeguard Americans’ employer-sponsored pensions and created the individual retirement account (IRA). Assets earmarked for retirement totaled $0.4 trillion at year-end 1974 (see the figure below). At this modest start, private-sector defined benefit (DB) plans accounted for 35 percent of the total; federal, state, and local plans for 34 percent; private-sector defined contribution (DC) plans for 17 percent; annuities for 13 percent; and there was a mere glimmer of IRA assets by year-end. Currently, total U.S. retirement assets are $23.0 trillion, and their composition has shifted considerably over the past 40 years.
TOPICS: 401(k)Fixed IncomeGovernment AffairsInvestment EducationInvestor ResearchPolicy ResearchRetirement PolicyRetirement ResearchSavingsTaxesTreasury
Sizing Up Mutual Fund and ETF Investment in Emerging Markets
By Chris Plantier
August 18, 2014
In coming decades, emerging market (EM) economies will need substantial new capital to accompany and sustain their rapid growth.
TOPICS: Bond FundBondsEquity InvestingEuropeExchange-Traded FundsFinancial MarketsFinancial StabilityFixed IncomeFund RegulationICI GlobalInternationalMutual Fund
The Real Lessons to Be Learned from 1994’s Bond Market
By Brian Reid
July 29, 2014
A recent “Heard on the Street” column in the Wall Street Journal (“Heeding 1994's Bond-Market Lesson,” July 27, 2014) is correct in saying that there’s a lesson to be learned from the 1994 bond market—but it draws the wrong lesson.
TOPICS: Bond FundBondsFederal ReserveFinancial MarketsFinancial StabilityFixed IncomeFund RegulationInterest RateMutual FundRetirement ResearchSavingsTradingTreasury
European Banks Significantly Reduced Borrowing from U.S. Money Market Funds in June
By Chris Plantier
July 18, 2014
As we discussed in March and April, European banks have generally become less willing to borrow from U.S. money market funds due to regulatory pressures, especially at the end of the quarter. Specifically, the new Basel III requirements seek to increase capital ratios of banks and explicitly limit how much banks fund their operations through short-term borrowing (which includes short-term securities banks issue that money market funds invest in). This quarter-end effect was particularly strong at the end of June as European bank regulators continued to monitor bank progress toward meeting the new Basel III requirements, which will be fully phased in over the next few years.
TOPICS: BondsEuropeFederal ReserveFinancial MarketsFixed IncomeFund RegulationInvestment EducationMoney Market FundsTreasury
Some Facts About Roth IRAs and the Investors Who Use Them
By Todd Bernhardt
July 17, 2014
Since the individual retirement account (IRA) was created as part of the Employee Retirement Income Security Act of 1974 (ERISA), it has become a resounding success, accounting for the largest pool of assets in the U.S. retirement market. By the end of 2013, Americans held $6.5 trillion in IRAs, with 45 percent of that total—$3.0 trillion—invested in mutual funds.
TOPICS: Bond FundEquity InvestingFixed IncomeInvestment EducationInvestor ResearchMutual FundRetirement ResearchSavings
“Market Tantrums” and Mutual Funds: A Second Look
By Sean Collins and Chris Plantier
May 19, 2014
Over the past year, policymakers who are focused on financial stability have pursued a theory that mutual fund investors can destabilize financial markets by redeeming from funds when markets decline. According to this theory, redemptions by fund investors lead fund managers to sell securities; those sales drive asset prices down further and, in turn, spur more investor flight, redemptions, and price declines.
TOPICS: Bond FundBondsFinancial MarketsFinancial StabilityFixed IncomeFund RegulationInterest RateInvestor ResearchMutual FundTradingTreasury
Seasonality, U.S. Money Market Funds, and the Borrower of Last Resort
By Chris Plantier
April 16, 2014
The March money market fund holdings data indicate a large drop in the share of fund assets allocated to European counterparties and a large increase in the share of fund assets allocated to U.S. counterparties. This shift is likely temporary and reflects reduced willingness of European banks to borrow from money market funds at the end of the quarter, rather than reduced demand from money market funds. Also, the increase in lending to U.S. counterparties is almost entirely due to the large increase in money market fund lending to the Federal Reserve via its overnight reverse-repo (repurchase agreement) facility.
TOPICS: BondsEuropeFederal ReserveFinancial MarketsFixed IncomeFund RegulationInvestment EducationMoney Market FundsTreasury
U.S. Prime Money Market Funds and European Borrowing
By Chris Plantier
March 18, 2014
European holdings by U.S. prime money market funds have fluctuated significantly since early 2011.
TOPICS: BondsFederal ReserveFinancial MarketsFixed IncomeFund RegulationInvestment EducationMoney Market FundsTreasury
ETFs Don’t Move the Market—Information Does
By Shelly Antoniewicz
March 11, 2014
There they go again.
TOPICS: Bond FundBondsExchange-Traded FundsFinancial MarketsFixed IncomeInterest RateTrading
Money Market Funds and Liquidity Ratios: Why So High and Stable?
By Chris Plantier
February 19, 2014
Second in a series of posts about ICI’s new data release, a monthly compilation and summary of portfolio data from taxable money market funds. To find out more, read the first post about the new data summary or this list of answers to frequently asked questions.
The SEC’s 2010 money market fund reforms require taxable funds to hold at least 30 percent of their assets in securities that are deemed to be liquid within five business days (known as weekly liquidity) and at least 10 percent of their assets in securities that are deemed to be liquid in one business day (known as daily liquidity). In practice, money market funds—especially government money market funds—hold liquidity well above these minimum standards, and these ratios change very little in any given month.
TOPICS: BondsFederal ReserveFinancial MarketsFixed IncomeFund RegulationInvestment EducationMoney Market FundsTreasury
ICI’s New Data Release: Further Enhancing the Transparency of Money Market Funds
By Chris Plantier
January 21, 2014
The 2010 reforms to money market mutual funds greatly enhanced the transparency of these funds, giving regulators, analysts, and investors greater insight into important elements of funds’ holdings and operations.
The reforms required funds to disclose their entire portfolio holdings to the public on their company websites five business days after the end of each month. Money market funds also are required to file a more detailed disclosure—SEC Form N-MFP—with the Securities and Exchange Commission directly. The SEC releases this more detailed data to the public 60 days after it’s filed. The SEC does not, however, summarize the data, leaving the public with no non-commercial access to a broad look at holdings across the industry.
TOPICS: BondsFederal ReserveFinancial MarketsFixed IncomeFund RegulationInvestment EducationMoney Market FundsTreasury
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