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Follow The Flow: Reflation (flows) is here

According to BofA Merrill Lynch Global Research, Inflows continued across IG short-dated and HY funds in Europe. Investors are adding yield shifting away from duration risk. Last week’s flows >>> HG: +$920mn / HY: +$287mn / Equities: +$73mn

Reflation flows benefit HY/Equities vs IG

Inflows continued across IG short-dated and HY funds in Europe as investors have been adding yield, shifting away from duration risk. Equities show signs of recovery in terms of flows, while EM debt continues to see healthy inflows. As rates move wider, we expect high yield and short-duration plays will outperform, with flows following performance.

Over the past week…

High grade funds continued on a positive trend for the fourth week in a row; however the pace has slowed down w-o-w. The monthly data for the asset class showed that January recorded positive flows after seeing outflows during the last two months of 2016. High yield funds inflows decelerated notably, but remained positive for the 11th consecutive week. Looking into the domicile breakdown, as charts 13 and 14 show, European-focussed funds recorded an outflow, the largest in ten weeks. The inflow seen across HY funds was concentrated in US domiciled and globally-focused funds. Monthly data reveal that January’s inflow was the strongest in the past 2 years.

Government bond funds recorded a fourth week of outflows; but monthly data were positive for January, for the first time in five months. Money market funds weekly flows were negative after a brief positive week, while the monthly data remained positive for the fourth month in a row. Overall, fixed income funds flows - although positive - have slowed down over the past weeks. Nonetheless, January data for fixed income funds showed a strong inflow, the first in three months and the largest in five.

European equity funds flows were positive for a fourth week but marginal in volumes. Even monthly flow data remained negative in January; the outflow was the smallest over the past twelve month of constant outflows.

Chart 1: Monthly flows into HY and Equity funds($mn)

Global EM debt fund flows continued on the positive trend for a third week, as monthly data for January flow trends are positive after two months of large outflows. Commodities funds flow remained positive for a fifth week.

On the duration front, inflows continued in short-term IG funds for the ninth week in a row, recording a cumulative inflow of $6.6bn. Mid-term funds’ flows were negative for a second week, while flows into long-term funds remained positive for a second week.

Bank of America Merrill Lynch , February 20

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