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US yield curve inversion the latest wrinkle for mutual fund investors

The second week of August saw yields on two-year US Treasuries exceed those of 10-year notes for the first time since 2007, a development viewed by large segments of the investing public and the financial industry as a clear-cut warning that the world’s largest economy will likely slip into recession during the next 18 months.

Mutual fund investors have been acting for most of 2019 as if the end of the post-financial crisis recovery is imminent, liquidating their Equity Fund positions – despite solid market gains – and pouring money into both Bond and Money Market Funds. They stuck to that script during the week ending August 14, steering another $16 billion into EPFR-tracked Bond Funds and $7.6 billion into Money Market Funds while pushing year-to-date redemptions from all Equity Funds over the $185 billion mark.

Expectations that the US Federal Reserve will respond by aggressively pushing down yields at the front end of the Treasuries yield curve influenced flows to several fund groups. Yield hungry investors arrested the flow of money out of High Yield Bond Funds and committed fresh money to Dividend Equity Funds for the second time in the past three weeks. But Emerging Markets Equity and Bond Funds both posted outflows as the prospect of a weaker dollar, and the possibility that will trigger fresh ‘currency wars’, deterred investors.

 

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