'Lust for Yield' Pauses as U.S. Stock Inflows Hog the Spotlight

  • U.S. equity flows year-to-date return to positive territory
  • Higher Treasury yields crimp demand for EM securities: BofAML

Asian Stocks Follow U.S. Gains

Investors continued to show an appetite for U.S. equities on tax reform expectations yet turned cautious on emerging-market assets as Treasury yields rose, according to Bank of America Merrill Lynch, citing EPFR Global fund flow data.

They poured $6.1 billion into funds tracking U.S. stocks in the week to Oct. 25, the bank said in a research report, the second “chunky” week of inflows. U.S. stock portfolios have posted $13.4 billion of inflows in the past four weeks.

Investors pulled $700 million from emerging-market equity funds, the first outflow in 10 weeks. Local-currency emerging-market debt funds also experienced redemptions. The flows are the first sign higher U.S. Treasury yields are causing the “lust for yield” to pause, according to the report.

The S&P 500 Index extended a record high this week and sentiment was bolstered further by a U.S. budget resolution that passed through the U.S. House on Thursday that should advance prospects for tax reform. U.S. Treasury yields climbed to the highest level in seven months amid speculation the next Federal Reserve chairman will be more hawkish.

Trend Reversal

The inflows mark a reversal from the shift out of the U.S. and into stocks of Europe, Japan and emerging markets. A net $823 million has been invested in U.S. equity funds since the beginning of the year, a return to positive territory. European stocks are sitting on an inflow of $39.4 billion and Japanese equities $28.2 billion.

Elsewhere, investment-grade bond funds gained $5 billion of new money, the 44th straight week of inflows. Government bond funds suffered a sixth straight week of redemptions as investors withdrew $400 million. Gold funds gained $200 million.

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