Largest withdrawals from global bond funds in 20 years

Global bond funds saw their worst downturn since at least 1990, a 10.2% average fall in net asset values

Largest withdrawals from global bond funds in 20 years

The first three quarters of this year witnessed the largest withdrawals from global bond funds in two decades as central banks' significant interest rate increases to combat inflation stoked worries of a recession.

In a recent report, Reuters said global bond funds experienced a cumulative outflow of US$175.5 billion in the first nine months of this year, the first net sales in that time span since 2002, based on data from Refinitiv Lipper.

The data indicates that global bond funds experienced their greatest fall since at least 1990, a 10.2% average decline in net asset value.

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Governments and businesses borrowed a lot in recent years, taking advantage of historically low interest rates. As a result of a rise in yields, they now face larger interest liabilities.

"The combination of high debt levels and a rise in interest rates has reduced investors' confidence in the government's ability to pay back debt, which has resulted in the massive outflows we are seeing," Jacob Sansbury, CEO at Pluto Investing, told Reuters.

Considering the likelihood of neither a decline in interest rates nor a reduction in debt loads, he noted that bond fund withdrawals might continue through 2023.

In the first three quarters of this year, there was a net outflow of roughly US$80 billion from emerging market bonds, compared to net inflows of US$65.81 billion and US$16.44 billion from U.S. high yield bonds, respectively.

In the most recent quarter, investors withdrew US$6.67 billion from the iShares UK Gilts All Stocks Index (UK) D Acc, US$2.16 billion from the ILF GBP Liquidity Plus Class 2 fund, and US$993 million from the Vanguard U.K. Short Term Investment Grade Bond Index GBP Acc fund.

Bonds, according to some fund managers, now look appealing following this year's downturn. This year alone, the ICE BoFA U.S. Treasury Index has decreased by 13.5%, while the Bloomberg Global Aggregate Bond Index has decreased by roughly 20%.

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According to Jake Remley, portfolio manager at Income Research + Management, "the yield cushion now protects the investor against negative total returns substantially more than it did at the beginning of the year."

"However, it’s important to note that there will likely be further credit stress in many corners of the bond market and risk management is paramount in these uncertain times."