November 4, 2016 / 3:07 PM / in 2 years

Investors buy govt bonds, dump junk debt before US election-BAML

LONDON, Nov 4 (Reuters) - The possibility of a U.S. election win for Donald Trump has driven investors into safe-haven assets, Bank of America Merrill Lynch said on Friday, noting huge junk bond outflows and inflows to government bond funds for the first time in 17 weeks.

Ahead of the Nov. 8 election, polls are showing Democrat Hillary Clinton neck-and-neck with Republican Trump. Clinton is viewed by investors as the candidate of the status quo, while they are fearful of what a Trump victory might mean for foreign policy, trade relations and immigration.

“A pre-election week of risk-off flows,” BAML said of the data, which captures flows to Nov. 2. But it added redemptions were “orderly rather than panicky.”

Government bond funds attracted $300 million, while high-yield bonds saw $4.4 billion flee, the largest weekly outflow since January. That drove an overall sector outflow of $1.1 billion, the largest in 18 weeks.

World equity funds lost $3.8 billion overall, the seventh outflow of the last eight weeks, led by U.S equities which lost $3.5 billion. Emerging market equity funds saw their first outflows in six weeks and investors also bought gold, the bank said.

Some cash flowed to European equity funds for the first time in 39 weeks, albeit a meagre $83 million, BAML said, citing data from fund-tracker EPFR.

The bank noted currency volatility measures showed certain assets such as the Mexican peso had “gone a long way toward pricing in a surprise Trump victory next week but other assets such as S&P500, European peripheral bonds, EM (emerging market) equities have not fully priced-in the event.”

Emerging market fixed income attracted inflows for the 18th consecutive week.

Investors also reacted to signs of rising inflation, with the largest inflows to inflation-protected bonds since April 2015, taking in $1.4 billion.

So far this year, equity fund outflows have totalled $151 billion, all from developed markets, while bond fund inflows have reached $185 billion, the data showed. (Reporting by Helen Reid; Editing by Mark Potter)

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