Global fixed income funds enjoyed their strongest inflows in four months over the past week, showing how bond investors are tiptoeing back into the market after rising interest rates triggered an exodus in October.

Bond funds tracked by EPFR Global attracted $5.5bn in the week ended Wednesday, the first weekly inflows since mid-September and their heftiest haul since the seven days to July 11.

Renewed appetite for American bonds powered the rebound. Emerging market and European-focused debt funds continued to see outflows, but funds targeting US bonds attracted $6.2bn. That is their biggest inflow since the start of the year.

Signs of some tentative stability have begun to lure investors back. The Bloomberg Barclays Aggregate, the biggest US fixed income gauge, is still nursing a 2.5 per cent loss for the year — which would be the biggest annual reversal since 1994 — but has seen a small bounce since the beginning of November.

The Federal Reserve’s steady interest rate increases and concerns over the withdrawal of monetary stimulus from other major central banks have lifted yields across developed and emerging economies. Yields rise as bond prices fall.

Bond funds are recovering from the market turmoil of October, when they suffered outflows of $36bn, the biggest monthly redemption in almost three years.

Benchmark US government bond yields remain near multiyear highs — the 10-year Treasury yield stands at 3.23 per cent, the highest since 2011 — but the recent midterm elections have calmed concerns that another Republican sweep could trigger more deficit-busting tax cuts.

“The Treasury market is trading higher this morning as investors seem to feel a little better now that the gridlock has returned,” Kevin Giddis, head of fixed income at Raymond James, said on Thursday. “The broader view is that there will not likely be another tax cut, which in turn, means that there won’t likely be a need to keep the pedal down on the size of each Treasury auction.”

Nonetheless, investors remain on edge over a sea change in the global monetary environment, and the implications for the bond market.

The Fed held interest rates steady on Thursday but did nothing to dissuade traders from pricing in another rate increase next month. It also continues to shrink its balance sheet. Meanwhile, the European Central Bank will end its quantitative easing programme by the end of the year, and the Bank of Japan has also started to tweak its policy setting.

“With a Fed firmly in tightening mode and government borrowing needs ramping up, upward pressure on US Treasury yields is likely to continue for the foreseeable future,” Wells Fargo analysts said in a note.



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