September 13, 2018 / 10:17 PM / a year ago

UPDATE 1-Investors favor lower-risk bonds in latest week -Lipper

 (Adds details on funds, investor comment)
    By Trevor Hunnicutt
    NEW YORK, Sept 13 (Reuters) - Investors favored lower-risk
U.S. bond exposure during the latest week, Lipper data showed on
Thursday, as trade conflicts, an emerging market crisis and
contradictory economic news spoiled the idea of a smooth sprint
through the second half of the year.
    U.S.-based taxable debt funds pulled in $2.4 billion while
their equity counterparts faced withdrawals of $1.8 billion,
Lipper said. The research service's data covers activity in
mutual funds and exchange-traded funds (ETFs) for the week ended
Sept. 12.
    Markets wrestled with prospects of a U.S.-China trade war
despite reports that U.S. President Donald Trump's
administration has put out feelers to Beijing for a new round of
trade talks.
    Emerging market stocks and currencies remained under
pressure from heavy debt loads denominated in dollars that have
grown more scarce and expensive this year as the U.S. Federal
Reserve tightens monetary policy.
    Even within U.S. bonds, investors favored lower risk.
High-yield bond funds, which are speculative and trade in
sympathy with equities, posted $862 million in withdrawals
during the week, the most since early July, according to Lipper.
    Yet higher quality investment-grade corporate bond funds
pulled in $3.2 billion and Treasury funds attracted $2.2
billion, the most for both categories since April.
    Michael DePalma, chief executive officer at PhaseCapital LP,
said markets have been demanding higher returns from riskier
bonds in recent months.
    "The widening of credit spreads may be the canary in the
coal mine for global investors, as credit markets are flashing
an early warning about financial conditions amid the ongoing
[emerging markets] crisis and China-U.S. trade uncertainty,"
said DePalma.
    "The bond market is clearly signaling something different
than the seemingly invincible equity market."
    On Friday, data showed U.S. wages notched their largest
annual increase in more than nine years. Adding to
the narrative of a tight job market that could spur inflation,
Labor Department data on Tuesday showed job openings surged to a
record high in July.
    Yet producer and consumer price data released later in the
week disappointed expectations, suggesting that inflation
pressures are actually waning.
    Weaker inflation could stall Fed rate hikes, a short-term
positive for stocks, but could also represent an early warning
sign for economic growth. Investors seemed to bet on inflation,
with funds invested in debt that increases in value alongside
prices, taking in $348 million and most cash since July.
    The following is a breakdown of the flows for the week,
including mutual funds and ETFs:
 Sector                    Flow Chg  Pct of    Assets     Count
                           ($ blns)  Assets    ($ blns)   
 All Equity Funds          -1.807    -0.02     7,512.012  12,245
 Domestic Equities         0.888     0.02      5,390.279  8,707
 Non-Domestic Equities     -2.695    -0.13     2,121.734  3,538
 All Taxable Bond Funds    2.441     0.09      2,817.005  6,066
 All Money Market Funds    -3.790    -0.14     2,747.136  1,037
 All Municipal Bond Funds  -0.136    -0.03     429.345    1,432
 (Reporting by Trevor Hunnicutt
Editing by Leslie Adler and Grant McCool)
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