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Government bond yields are at it again: 10-year US Treasury yields have fallen back below the 1.3 per cent mark for the first time since February, and gilt yields are also at five-month lows.
Opinion is split on whether the reflation trade is over or simply pausing for breath: after all, both these yields are still well above turn-of-the-year levels. But the sight of developed market sovereign yields resuming their downwards march is a familiar one. It’s worth considering the fund flow picture, too.
This may turn out to be a record year for equity funds, but bond strategies are still leading the way: the latter took in $372bn in the first half of 2021 compared with equity funds’ $160bn, according to the Investment Company Institute.
The gap’s smaller in the UK but is still apparent: in the first five months of the year, net retail sales of bond funds stood at just under £7bn, compared with £6bn for equity funds.
Domestically speaking, much of that interest has been in credit. But UK gilt fund sales are comfortably up year-on-year, too.
DFMs have taken a slightly different tack: as we reported a fortnight ago, May saw a notable drop in moderate portfolios’ allocations to bonds of all stripes. The sight of government bond yields falling once again, and credit spreads getting tighter and tighter, will arguably only increase that nervousness.
Be that as it may, the wider market’s appetite for fixed income – in its various shapes and forms – is again confounding expectations.
One part of the bond universe capturing particular attention at the moment is green bonds – but the rise of such instruments shouldn’t obscure other ESG fixed income developments.
Last week the chancellor used a Mansion House speech to announce a green finance plan, and on this front the government is very much swimming with the tide rather than setting out alone.
After a lull last year, green bond issuance has surged again so far in 2021. That’s in keeping with other ESG instruments, like social bonds or sustainability linked bonds, which have managed to maintain the healthy growth rates posted in 2020.
There are also positive noises coming from DFMs’ own client bases. Research from Aviva Investors finds two in five advisers say they’re seeing an increase in demand for ESG bonds.
Here, however, green bonds lag behind. Two thirds said they were likely to use sustainability-linked bonds to help meet the growing appetite, but just 19 per cent said they would turn to green bonds.
M&G’s Bond Vigilantes team points out that a surge in SLB issuance this year has been accompanied by a growing number of high-yield issuers becoming involved. That underlines the “even greater need for quality assessment” that comes with all ESG-related issuance. The growth of all these areas means, in the team’s words, ESG-themed bonds “can no longer be ignored by fixed income investors, whether you run sustainable portfolios or not”.
In an era of heightened liquidity concerns, co-investor risk has become more important to fund selectors – particularly when they and their rivals can invest sizeable amounts in any given strategy.
This week brings confirmation that one of the most successful funds of recent years has an investor who’s themselves more of a lynchpin than a cornerstone.
The Blue Whale Growth fund was seeded with £25m from Peter Hargreaves back in 2017. The fund has now risen to £866m in size; Hargreaves said this week his family’s own stake has risen to more than £200m.
Yet this particular case won’t be of major concern to professional buyers. For one thing, most tend to focus their global equity interest elsewhere: Blue Whale is in no small part still a retail phenomenon. For another, Hargreaves – as chairman of the firm – isn’t likely to be divesting the family money any time soon.