U.S. Bond Funds Experience Significant Inflows

(Reuters) – U.S. bond funds saw robust inflows in the week to August 28, driven by a strong interest in government bonds. This movement is largely attributed to expectations regarding a Federal Reserve interest rate cut in September and heightened investor caution over geopolitical tensions in the Middle East.

As reported by LSEG data, U.S. bond funds attracted a net inflow of $9.58 billion during the week, marking the largest weekly inflow since July 17.

Traders have priced in a 67% likelihood of a 25 basis point cut and a 33% chance of a 50 basis point reduction, according to the CME Fed Watch tool.

Investors channeled $5.42 billion into U.S. government bond funds, recording their largest weekly net purchase since October 2023. They particularly focused on U.S. short/intermediate government and Treasury funds, amounting to $4.84 billion, which is the largest since March 2023. Additionally, U.S. short/intermediate investment-grade funds saw inflows of $1.89 billion.

Meanwhile, money market funds observed a fourth consecutive weekly inflow, totaling approximately $10.62 billion.

Conversely, U.S. equity funds reported net sales of $2.83 billion for the week, following net purchases of $6.58 billion the previous week. Investors withdrew $1.35 billion from large-cap funds, in a partial redemption of $5.33 billion net purchases from the prior week. Mid-cap and multi-cap funds also faced outflows of $798 million and $168 million, respectively.

Small-cap funds, however, recorded a second consecutive week of inflows, amounting to $1.03 billion on a net basis.

By sector, notable outflows included consumer staples ($528 million), healthcare ($337 million), and utilities sector funds ($208 million). In contrast, the financials sector experienced a third week of inflows, totaling approximately $783 million.