Investors remained cautious on the so-called Trump trade over the past week, as political wrangling in Washington drove more money into bond funds and bond proxies.
Junk bond funds collected $1bn in new money in the week to February 8, while investment grade corporate bond funds gained $2.1bn, the fourth straight week of inflows for highly rated company debt, according to data from EPFR. Utilities-focused equity funds, seen as bond proxies due to their high dividends, took in $296.5m, reversing four weeks of outflows.
Legal challenges to Mr Trump’s travel ban, alongside a contentious confirmation for the new education secretary Betsy DeVos, weighed on markets over the past week, heightening investor scepticism over the potential for rapid stimulus to the US economy.
The Trump trade has been built on the belief that the combination of infrastructure spending, tax cuts and looser regulation would send interest rates and inflation higher and boost companies stock prices. US equity funds saw $1.6bn in outflows.
US Treasury yields, which move inversely to prices, dipped close to 2017 lows on Wednesday and gold, another haven in times of investor nervousness, hit a three-month high.
“I have no doubt that it is the administration’s and Congress’s intent to do some of the things we think will be pretty positive for the market. Things like corporate tax reform, personal tax reform, reducing regulation,” said Matt Freund, co-chief investment officer at Calamos Investments. “That legislative process is designed to be difficult. Will it happen? Yes. But will it be as easy as the market thought in November? No.”
That momentum began to change course on Thursday when Mr Trump promised a “phenomenal” corporate tax announcement in the next two to three weeks. It served to allay concerns about the lack of detail yet to be provided over some of the new administration’s more economically stimulative policies, such as tax reform and infrastructure spending.
Treasury yields rose and the S&P 500 climbed to a fresh high, but the flows data will not capture the brighter mood because it only tracks investor’s movements to Wednesday.
Still, the US five-year break-even rate, a market measure of inflation expectations, remains 10 basis points below recent highs. A disappointing jobs report for January cast doubt over the likelihood that the Federal Reserve will raise interest rates when it next meets. Market expectations of a rise have fallen to 26 per cent from 32 per cent a week ago.
It has helped bolster investor sentiment towards bond funds and utilities, with fears of price declines from rising interest rates tempered.
Utilities typically draw investors when bond yields are low or falling. They had fallen out of favour in the months since Mr Trump was elected as investors flocked to areas that benefit when rates are rising and the economy is growing, such as banks.
But investors have begun revising expectations about the pace of economic changes under the new administration coming to fruition.
“The reality of how Washington works has begun to settle back in,” said Brian Reid, chief economist at the Investment Company Institute.
Elsewhere, emerging market equity and bond funds saw strong inflows of $1.1bn and $3.5bn, respectively.
“You have this combination of a cheap out of favour sector that’s starting to show momentum and that’s why you’re seeing the movements you have,” said Mr Freund.