Negative Yields, `Brexit' Combine to Drive Europe Fund Outflows

  • Flows into U.S. bond funds rise as investors seek safety
  • European equity funds see biggest outflows since 2014

Investors are ditching European bonds and equities in favor of U.S. fixed-income assets as debt yields sink in the region and concerns mount that the U.K. may exit the European Union.

Investors redeemed more than $1.5 billion from European bond funds in the week ended Feb. 17 while adding almost $6 billion to U.S. counterparts, according to EPFR Global data. Europe’s equity funds had their biggest outflows since 2014. That all happened as EU leaders were about to begin a summit in Brussels where the U.K. sought to curb welfare on non-British citizens.

Market volatility has surged this year and investors have shun assets deemed riskier on growing worries over the global economic outlook, persistent low oil prices and the efficacy of central-bank stimulus that dragged yields of $2.2 trillion worth of European debt below zero. Equities worldwide lost as much as $8.6 trillion in value this year, and a measure of financial stress reached a four-year high. Cash piles are at their highest levels since 2001, according to a Bank of America Corp. fund-managers survey this month.

“Amidst a sea of troubles, real and potential, mutual fund investors focused on Europe,” the EPFR report said. “European bond funds continue to struggle with the growing amount of debt stock offering negative interest rates, concerns about corporate debt tied to the financial and energy sectors and fears that the euro zone’s economic recovery is stalling. U.S. Bond Funds remained the dominant money magnet.”

Spanish bond funds recorded their biggest outflows since the middle of the third quarter, and investors withdrew money from European investment-grade corporate bond funds in five of the past six weeks, according to the report dated Feb. 18. Equities in total lost $12 billion, with investors pulling almost $1 billion from German funds, the most in nine months. In turn, they focused on assets deemed safer. Gold funds had their biggest inflows in 56 weeks.

The report also showed flows into U.S. inflation-protected bond funds climbed to an 11-week high, even as expectations for price growth in the nation dropped to a seven-year low that week. The market’s five-year estimate for inflation beginning five years from now, a model the Federal Reserve uses in setting rates, dropped to 1.35 percent on Feb. 11, a record low in data going back to 1999.

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