Neil Sun, Portfolio Manager on the BlueBay U.S. Fixed Income team, discusses how a robust influx of capital will continue to be supportive for the fixed income asset class.
Watch time: 3 minutes, 27 seconds
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Welcome to the latest edition of The Weekly Fix. My name is Neil Sun.
Three macro themes have captured investors' attention thus far in 2025: the US trade policy agenda, the evolution of AI, and the Fed's policy rate trajectory. As we await additional details regarding Trump administration’s approach to tariffs, we believe it could be useful to shift our attention to market developments happening away from the macro drama. This week, we’d like to highlight fund flows, particularly in the Investment Grade market, as these flows play a crucial role in impacting the demand function.
There are three primary investor groups in the Investment Grade (IG) market. The first consists of insurance and pension funds, which typically prioritize the all-in yield that IG bonds offer. The second group comprises of overseas investors who need to allocate US dollars from their savings pools, trade surplus and insurance underwriting activities. The third group includes retail and generic mutual funds, where investors are more concerned with total returns, and mutual fund flows tend to follow performance.
In 2024, we saw substantial inflows from mutual funds and ETFs into the Investment Grade market. So far in 2025, there has been a notable uptick in inflows, with nearly $8 billion added just in the past week. This increase in capital flow followed a solid positive total return for IG bonds in January. Meanwhile, we are also observing a rise in buying interest from overseas investors, where cross-currency cost of adding to US dollar assets has declined in several jurisdictions.
The combined inflows from Mutual Funds and overseas investors should help to counterbalance some of the decline in demand from yield-focused buyers, as core yields have experienced a rally of late. We believe this robust influx of capital will continue to be supportive for the asset class.
Having said that, we focus on the potential rise in spread volatility associated with macro events that leaves our risk positioning close to neutral. We maintain a preference for short-duration bonds as we await further clarity on trade policy from the Trump administration. Were core yields to rise further, particularly further out the Treasury curve, we anticipate attractive opportunities to re-engage with risk, hopefully at more favorable entry points once investors gain clarity on the policy front.
We are confident that active fixed income investors will be presented with ample opportunities to generate alpha across the asset class throughout 2025.
Thank you for watching, and good luck investing!
Key points
Three macro themes have captured investors' attention thus far in 2025: the US trade policy agenda, the evolution of AI, and the Fed's policy rate trajectory.
Continuing a theme from last year, fund flows into investment grade bonds funds have been robust.
We are focused on the potential rise in spread volatility associated with macro events that leaves our risk positioning close to neutral.
We maintain a preference for short-duration bonds as we await further clarity on trade policy from the Trump administration.