Record $600 Billion Floods Global Bond Funds as Investors Bet on Rate Cuts

Global bond funds experienced record inflows exceeding $600 billion in 2024, driven by investor bets on easing monetary policy from major central banks worldwide, as reported by the Financial Times. This surpasses the previous record of nearly $500 billion set in 2021.

"This was the year that investors bet big on a substantial shift in monetary policy that has historically supported bond returns," Matthias Scheiber, senior portfolio manager at Allspring, told the Financial Times.

The influx of funds was fueled by a combination of slowing economic growth and diminishing inflation, prompting investors to allocate capital to bonds offering relatively attractive yields.

"Inflation has come down pretty much everywhere, growth has softened pretty much everywhere . . . and that's a much more friendly environment to be a bond investor," said James Athey, bond portfolio manager at Marlborough, to the Financial Times.

However, while bond funds enjoyed record inflows throughout the year, the week ending December 18 saw a significant $6 billion outflow—the largest weekly withdrawal in nearly two years, according to data from EPFR.

Despite this recent outflow, bonds experienced a volatile year. After rallying over the summer, concerns emerged that global rate cuts might be slower than anticipated, leading to a slump in bond markets toward year-end. The Bloomberg global aggregate bond index, a broad benchmark of sovereign and corporate debt, surged in the third quarter but has since declined, ending the year down 1.7 percent.

The Federal Reserve's decision this week to cut rates by 0.25 percentage points—its third consecutive rate reduction—was met with mixed sentiment. While signaling continued easing, the central bank indicated a slower pace of rate cuts for next year, prompting a dip in US government bond prices and a two-year high for the dollar.

Despite the year-end volatility, investors remain optimistic about the long-term prospects for fixed-income products, particularly in light of ongoing disinflation and recessionary fears.

"While disinflation occurred, the recession didn't," said Shaniel Ramjee, co-head of multi-asset at Pictet Asset Management, to the Financial Times. However, Ramjee acknowledged that for many investors, the high starting yields on government bonds might not have fully compensated for price losses incurred during the year.

The resilience of corporate credit markets, with spreads reaching multi-decade lows in the US and Europe, has fueled a surge in corporate bond issuance as companies leverage favorable borrowing conditions.

Adding to the allure of fixed-income products, risk-averse investors are shifting funds from equities, particularly in the US, which are viewed as increasingly expensive.

"US equities have been sucking up flows like there's no tomorrow, but as interest rates have normalised investors have started to move back into traditionally safer bets," Athey observed.