U.S. Weekly FundFlows Insight Report: Investors Flock To Money Market Funds As Rate Hikes Probability Increases

Investors were net sellers of fund assets (including those of conventional funds and ETFs) for the third week in four, withdrawing a net $2.1 billion for the Refinitiv Lipper fund flows week ended Wednesday, February 22. Fund investors were net purchasers of money market funds (+$5.4 billion) while being net redeemers of equity funds (-$5.6 billion), tax-exempt fixed income funds (-$1.7 billion), and taxable bond funds (-$295 million) for the week.

Market Wrap-Up

Hot inflation data, hawkish comments by Federal Reserve officials, and rising interest rates weighed on both equities and fixed income securities during the fund flows week.

On the domestic side, after investors began coming to terms with the idea the Fed was unlikely to pivot to a dovish monetary policy any time soon, stocks took it on the chin for the fund flows week.

The Nasdaq Composite (-4.68%) witnessed the largest market decline of the broad-based U.S. indices, bettered by the S&P 500 (-3.77%) and the Russell 2000 (-3.38%).

The Dow Jones Industrial Average (-3.17%) did the best job mitigating losses of the group. Overseas, the Xetra DAX Total Return Index (-1.13%) posted the largest losses of the often-followed broad-based international indices, while the FTSE 100 (-0.31%) and the Shanghai Composite (-0.38%) were the relative group leaders.

For the fund flows week, the Bloomberg Municipal Bond Index (-1.24%) suffered the largest losses on the fixed income side, bettered by the Bloomberg U.S. Aggregate Bond Index (-0.83%) and the Morningstar LSTA U.S. Leveraged Loan Index (-0.36%).

On Thursday, February 16, the Dow ended down some 430 points on the day after hot inflation data and hawkish tones by Fed officials fanned rate hike worries. Data released by the U.S. Bureau of Labor Statistics showed that inflation at the wholesale level rebounded in January as the producer price index rose 0.7% for the month - its largest rise since last summer.

Adding to investor concern, two non-voting members of the Federal Reserve voiced their opinions that the rate hike during the most recent FOMC policy-setting meeting perhaps should have been 50 basis points (bps) rather than the 25 bps hike announced on February 1.

In other news, first-time jobless claims for the prior week stayed below the 200,000-mark for the fifth consecutive week, signaling the labor market remains quite strong. The 10-year Treasury yield rose five bps, closing out the day at 3.86%, while the two-year Treasury yield remained unchanged at 4.62%.

U.S. stocks ended mixed on Friday, February 17, after investors bet on more Fed interest rate hikes in the near term. The Dow, slipping just 0.1% on the day, logged its third consecutive week of declines - its longest weekly losing streak since September.

Speaking at the Tennessee Bankers Association Credit Conference, Fed governor Michelle Bowman conveyed her concern that inflation isn’t subsiding quickly enough, leading many pundits to believe that the Fed will continue hiking interest rates.

In support that recent interest rate hikes have had some influence on the economy, the Conference Board said that its U.S. January leading economic index fell 0.3% for a 3.6% decline over the last six months - in line with analyst expectations. The 10-year Treasury yield declined four bps to 3.82%.

U.S. markets were closed on Monday, February 20, in observance of Washington’s birthday.

Stocks posted their worst one-day performance since mid-December on Tuesday, February 21, after a few major retailers, such as Home Depot (HD), released disappointing forward guidance and investors came to terms with the possibility that the Fed may need to hike interest rates higher and for a longer period than was previously expected.

According to the CME FedWatch tool, Fed funds futures traders priced in a 76% probability that the Fed will raise rates by 25 bps on March 22, followed by another 25 bps hike in May, pushing the terminal rate between 5% and 5.25%. The 10-year Treasury yield rose 13 bps to 3.95%.

On Wednesday, February 22, the S&P 500 posted its fourth day of losses as investors digested interest rate news from the Fed’s minutes from its February 1 policy-setting meeting, where several members noted that financial conditions eased, which some indicated might necessitate tighter monetary policy.

In a televised interview, St. Louis Fed President James Bullard said he continued to expect a peak fed funds rate of 5.38%, or a range of 5.25 to 5.5%, to combat inflation. Nonetheless, the 10-year Treasury yield declined two bps to 3.93%

Exchange-Traded Equity Funds

Equity ETFs experienced net outflows for the first week in five, handing back a little more than $3.5 billion for the most recent fund flows week. Authorized participants (APs) were net redeemers of domestic equity ETFs (-$5.2 billion), withdrawing money for the second consecutive week, while nondomestic equity ETFs witnessed their ninth week of net inflows in a row, taking in $1.6 billion this past week.

International equity ETFs (+$2.0 billion) observed the largest net inflows of the equity ETF macro groups for the fund flows week, followed by equity income ETFs (+$780 million) and the commodities heavy, sector other ETFs (+$128 million) macro group. Meanwhile, large-cap ETFs (-$3.9 billion) suffered the largest net outflows, bettered by sector technology ETFs (-$782 million).

JPMorgan BetaBuilders Europe ETF (BBEU, +$907 million) and Invesco QQQ Trust 1 (QQQ, +$632 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, SPDR S&P 500 ETF (SPY, -$2.3 billion) experienced the largest individual net redemptions and iShares Core S&P 500 ETF (IVV, -$1.2 billion) suffered the second largest net redemptions of the week.

Exchange-Traded Fixed Income Funds

For the second week in three, taxable fixed income ETFs witnessed net inflows, although taking in just $315 million this week. APs were net purchasers of government Treasury ETFs (+$6.0 billion) while being net redeemers of corporate high-yield ETFs (-$4.4 billion), international & global debt ETFs (-$678 million), and corporate investment-grade debt ETFs (-$614 million).

iShares Short Treasury Bond ETF (SHV, +$3.1 billion), SPDR Portfolio Short Term Treasury ETF (SPTS, +$859 million), and SPDR Portfolio Intermediate Term Treasury ETF (SPTI, +$754 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile, iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD, -$2.3 million) and iShares iBoxx $ High Yield Corporate Bond ETF (HYG, -$2.0 billion) handed back the largest individual net redemptions for the week.

For the fifth week in a row, municipal bond ETFs experienced net outflows, handing back $368 million this week. iShares National Muni Bond ETF (MUB, +$105 million) witnessed the largest draw of net new money of the municipal bond ETFs, while iShares Short-Term National Muni Bond ETF (SUB, -$238 million) experienced the largest net redemptions in the subgroup.

Conventional Equity Funds

Conventional fund (ex-ETF) investors were net sellers of equity funds for the fifty-fifth week in a row - redeeming $2.0 billion - with the macro group posting a 3.24% market decline for the fund flows week.

Domestic equity funds, suffering net redemptions of slightly less than $1.9 billion, witnessed their eighth consecutive week of net outflows while posting a 3.58% market drop on average for the fund-flows week.

Nondomestic equity funds - posting a 2.42% weekly market loss on average - observed their forty-fifth week of net outflows in 46, handing back slightly less than $56 million this week.

On the domestic equity side, fund investors - while injecting $53 million into small-cap funds - were net redeemers of large-cap funds (-$1.1 billion) and gold and natural resources funds (-$501 million).

Investors on the nondomestic equity side were net purchasers of international equity funds (+$130 million) while being net redeemers of global equity funds (-$186 million) for the week.

Conventional Fixed Income Funds

For the first week in seven, taxable bond funds (ex-ETFs) witnessed net outflows - handing back $610 million this past week - while posting a 1.16% market loss on average for the fund flows week.

The corporate investment-grade debt funds macro group (+$798 million) attracted the largest amount of net new money of the taxable bond funds group for the week, followed by international & global debt funds (+$164 million) and flexible funds (+$159 million). Corporate high-yield funds (-$1.8 billion) suffered the largest net redemptions, bettered by balanced funds (-$149 million).

The municipal bond funds group posted a 1.32% market loss on average during the fund flows week (their third weekly market decline in a row) and witnessed net outflows for the first week in seven, handing back $1.3 billion this week.

High-Yield Municipal Debt Funds (-$803 million) suffered the largest net outflows of the macro group, bettered by General & Insured Municipal Debt Funds (-$170 million).

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