Bond and fixed income funds saw net inflows nearly double to more than $100 billion in Q3

KEY PRINCIPLES

Investors rushed to bond and fixed-income funds, with net inflows nearly doubling to more than $119 billion in the third quarter from the previous quarter.
In contrast, equity funds and ETFs experienced net outflows of $1.9 billion in the third quarter, compared with net inflows of $14 billion in the prior quarter.
Investors tried to lock in their high yields ahead of the Fed’s rate cut, and some moved to less risky assets as equity markets faltered and worries about a recession grew.

Investors rushed to bond and fixed-income funds in the third quarter on expectations of an interest rate cut by the US Federal Reserve and concerns that the economy is heading for a recession.

Bundle, mutual and fixed income exchange traded funds (ETFs) drew $119.1 billion in net inflows in the third quarter, up from $68.4 billion in net outflows in the previous quarter, according to Morningstar and Lipper data analyzed by YCharts.

Assets in money market funds rose to $318.6 billion from $26.2 billion net redemptions in the second trimester. In contrast, stock funds and ETFs experienced net outflows of $1.9 billion in the third quarter, compared with net inflows of $14 billion in the previous quarter, spurred by a steady drawdown from mutual funds.

The shift in investment in the third quarter reflected a market environment plagued by rising volatility, favoring so-called safe-haven assets such as bonds and cash. The S&P 500 fell 8.5% in early August, although it returned to an all-time high by the end of the quarter.

Meanwhile, investors have increasingly sought to lock in yields on income-producing securities ahead of an expected September interest rate cut by the Federal Reserve. The Fed has cut its reference rate 50 basis points (bps) in late September, its first rate cut since the Covid-19 pandemic.