Data Analysis: Net retail sales of bonds have come back into the black, according to latest data from the Investment Association, but the asset class is still facing resistance from institutional investors such as pension funds.
Key stats
Net fixed income outflow levels reduced in October 2015 to around £96m
Since October 2014, January saw the biggest outflows with a net £849.2m leaving fixed income funds
The only month with net inflows was February 2015
Thursday’s decision by the European Central Bank to push the deposit facility rate to -0.3 per cent suggests that low interest rates are here to stay.
This kind of environment makes fixed income investing less attractive for those seeking long-term yield, although markets are still awaiting the US Federal Reserve’s interest rate decision on December 16.
According to the IA, net sales of UK-based managers’ fixed income products to institutional investors are still negative, with nearly £96m flowing out in October, but markedly less than a month earlier when a net £727.6m was pulled from fixed income by institutions including pension funds. It is also less than the comparative year-on-year figure of £577.5m of net outflows.
During the year from October 2014 to October 2015, February was the strongest month for bond managers, when £166m of institutional money found its way into fixed income products (see graph).
Troughs were October 2014, and January, April and September of this year, with less marked outflow levels recorded for the other months.
This trend of continued outflows is corroborated elsewhere. In Europe including the UK, data service MandateWire also recorded net outflows for bonds; in the third quarter of this year a net £7.7bn was pulled.
Net outflows were seen across the fixed income spectrum in the third quarter, from index-linked bonds to corporate bonds and emerging market debt.
Dark pools for fixed income could emerge
The up-and-down of these flows – although firmly in the negative space – could partly be explained by the trade characteristics of bonds as, according to the ECB, they are traded less frequently but in larger chunks than equities.
The larger trade sizes in bond markets could also make fixed income trades more often eligible for transparency waivers.
In its latest Financial Stability Review, the ECB points out that dark pools, opaque trading areas which are currently only used for equities, could emerge for fixed income once the MiFID II directive and its stricter transparency requirements for bond trading come into force, which is expected to be early 2017.
