By Mark Hulbert
Record bond-fund inflows are a warning sign that lower returns are ahead
Bond mutual funds and ETFs tend to be below-average performers for several months following large inflows of new money – which is just what happened in the first quarter.
The chart below plots bond-fund inflow totals over the past several years, courtesy of data from EPFR, a firm that tracks institutional and retail investor flows. Bond funds have enjoyed 10 consecutive months of positive net inflows, according to EPFR.
Fund flows are a contrarian investment indicator. This inverse relationship between flows and performance was documented in a 2021 study in the Review of Finance: “ETF arbitrage, nonfundamental demand, and return predictability.” The researchers found that, between 2007 and 2016, the 10% of ETFs with the highest net inflows in a given month proceeded in the following month to underperform the decile of ETFs with the lowest inflows by 1.8% per month, on average.
To make sense of this result, it’s important to differentiate fund flows as a coincident indicator and as a leading indicator. In the former case, there is a strong positive correlation, which is hardly surprising. When bond funds perform strongly, they attract more inflows. But that influx of new cash causes the funds to perform even better, and so on in a self-reinforcing loop. The typical consequence is that bond rallies tend to overshoot, with the result that they reverse in the subsequent month. That’s why fund flows are an inverse leading indicator.
A similar self-reinforcing loop occurs when bond funds perform poorly, causing net outflows, which in turn leads to even poorer fund performance.
There’s nothing unique to bonds that creates this inverse relationship between fund flows in a given month and performance in the subsequent month. It also exists for stocks. First-quarter net inflows to U.S. equity mutual funds and ETFs ran at around a $77 billion annualized pace, according to EPFR – far less than the net inflows to bond funds. From a contrarian point of view, that suggests that U.S. bonds face stiffer headwinds over the next couple of months than U.S. stocks.
This doesn’t mean stocks won’t struggle. It just means that, assuming the future is like the past, bonds will struggle even more.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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-Mark Hulbert
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04-20-26 1116ET
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