Investors made the biggest shift in more than three years into funds that help provide protection against rising interest rates ahead of next week’s meeting of Federal Reserve policymakers who are expected to increase overnight borrowing costs for the first time this year.
Funds invested in leveraged loans attracted $1.7bn of inflows in the week to December 7 — the greatest weekly haul since 2013 — figures from data provider EPFR show. The funds hold securities consisting of floating-rate loans made by banks to companies that protect portfolios in a climate of rising official interest rates.
The inflows accompany continued pressure across sovereign debt markets, with the 10-year Treasury note yield rising from as low as 1.71 per cent on the night of the US election to 2.42 per cent on Friday.
Investors expect an accelerating US economic expansion under the incoming administration of Donald Trump, as increased government spending and reduced taxes bolster activity and inflation. That has some investors braced for a more aggressive tightening cycle from the Fed over the coming two years once the central bank nudges borrowing costs higher next week.
“It will not come as a surprise to any investor in the market if the Fed hikes,” said Andrew Hollenhorst, a rates strategist at Citi. “So most of the focus going into the meeting is around how they might change their projections.”
Interest rate futures price with near certainty that the central bank will raise its Fed funds corridor from 0.5 per cent to 0.75 per cent next week. Economists expect the benchmark rate will climb to 1.25 per cent by the end of next year, signalling at least two rate rises in 2017, and a further increase in Libor, the reference rate for floating rate securities and derivative contracts.
Money market funds also saw strong inflows globally, with $35bn added to the accounts. Uncertainty in the eurozone culminated over last weekend with voters rejecting a referendum on Italian constitutional reform and the resignation of Matteo Renzi, the country’s prime minister.
Seasonal profit-taking heading into the end of the year may also have benefited money market funds said Mr Hollenhorst. “People may be selling risk assets just to realise gains on those assets . . . You will typically see a run-up in money fund assets toward the end of the year.’’
The expectation of higher interest rates weighed on emerging market funds, which have seen flows closely linked to shifts in US monetary policy expectations. Investors pulled $1.8bn from emerging market equity positions and $2.4bn from emerging market bond funds in the past week, the EPFR data showed.
Risky high yield US corporate bond funds benefited by contrast, with $1.8bn of inflows over the period, bolstered by the expectation of faster domestic growth.