The global bond market has enjoyed its biggest weekly investor inflows in over four years, with investors dumping equity funds in favour of fixed income amid concerns that the international economy is wilting and central banks will have to cut interest rates.

Fixed income funds tracked by EPFR, a data provider, sucked in $17.5bn globally in the week ending June 5, the biggest inflows since February 2015. More highly rated “investment grade” funds took in $18.5bn — the biggest five-day inflow on record.

In contrast, riskier corners of the bond market — such as emerging markets or junk-rated corporate debt — suffered outflows, and equity funds saw another $10bn seep out, taking the cumulative withdrawals this year to $155bn. 

Buoyed by the more dovish stance by the US Federal Reserve, financial markets initially enjoyed a roaring start to the year. But the sudden re-emergence of global trade tensions in May has once again stirred concerns over the health of the US economy — and sparked speculation that policymakers will have to cut rates soon.

“The Fed seems ready to grant Donald Trump his wish and lower interest rates,” said Alexander Krämer, an analyst at Commerzbank. “Both the homemade trade dispute the US has with the rest of the world and the decline in inflation over the past few months provide the rationale behind such a move.”

The solidifying view that US interest rates have peaked and will soon head lower again also led investors to pull money out of US loan funds at the fastest pace this year. Lower interest rates weaken the attraction of loans, which pay a floating rate of interest that is tied to the ebb and flow of the Fed’s policy rate. 

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US loan funds suffered $1.4bn in outflows for the week ending June 5, the biggest one-week exodus from the floating-rate market since January 2, in the wake of the December stock market turmoil and the Fed first indicating a slower pace of interest rate increases in 2019. 

“If they start cutting rates I think you will have another round of outflows from loan mutual funds,” said Michael Anderson, a strategist at Citi.

Jay Powell, Fed chair, hinted that he was open to cutting interest rates if needed, promising to “act as appropriate” to keep US economic expansion on track despite the escalating trade war with China. 

Investors now think at least two Fed rate cuts are likely before the end of the year, according to the prices of interest rate futures, and that three or even four are possible. The first move lower could come in July, but the Fed funds futures market indicates a decent chance that might come as early as later this month.

“Without a deal, weak global and US growth will likely be persistent, forcing the Fed into a series of cuts,” warned James Sweeney, chief economist at Credit Suisse, adding that even a US-Chinese trade deal may not be enough to avert an “insurance cut” by the Fed to support growth. “Rising tariffs and growing uncertainty is a significant shock.”



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