Funds inflows have accelerated in US fixed income while investors prioritise spread risk over US Treasuries, a recent BofA Global Research report has observed, with data showing a preference for mixed allocation funds.
Over the last week, US fixed income fund inflows were more than double their average pace over the last month, reaching US$17.8 billion. This was primarily the result of mixed allocation inflows, analysts noted, which hit US$11.8 billion.
By contrast, long UST saw US$412 million in outflows last week, and high yield bonds recorded US$827 million in outflows.
“Overall fund inflows have accelerated-led by [mixed allocation] funds and renewed demand for short‑term and inflation products,” analysts observed.
“Our regression continues to suggest that funds remain underweight USTs, overweight MBS and are increasing IG risk allocation. They are relatively neutral curve.”
In US Treasuries, futures positioning suggests a bias for rater to sell off across the curve, the report said, adding that this is the result of built-up out-of-the-money longs and in-the-money shorts.
Concerns about JPY intervention have accelerated, with BofA strategists estimating the latest round was valued at US$72 billion – and expect that further intervention may follow. Analysts predict that a figure closer to US$100 billion in US Treasury sales to fund such intervention would be more impactful to the US Treasury market.
In the short term, however, no sales are expected. At the end of April custodial holdings were measured at US$12 billion, and foreign reverse repo remained flat.
“We therefore see few signs in the data signaling official UST sales in recent weeks. The widening in front-end swap spreads since 29 April is also inconsistent with any market-moving official sector sales,” the report stated.
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