2017 Bond market update

Political risks have been driving European bond flows in the first quarter of 2017

Looking over the past 3-months, here’s what has happened in the bond market:

  • 3-month accumulated flows (including Feb. 2017) demonstrated remarkable regional differences, which partly reflect this year’s political risk picture.
  • All major categories of European bond funds have seen outflows on a 3 month rolling basis, with European high yield being the only exception. US bond funds performed less poorly than their European counterparts, confirming our relative preference for US high graded bonds over European bonds. US Treasuries only suffering marginal outflows, whereas corporate bonds actually saw inflows in the beginning of 2017, likely driven by the general risk-friendly environment year-to-date.  
  • A falling US dollar and positive macro surprises caused EM bond funds to come back in favour, as outflows in the end of 2016 turned to inflows in the beginning of this year. In that sense, bonds very much reflected the same change in investor preferences as equities did on a regional level.

Is reflation trade short-lived?

“On a general note, the frequently cited reflation trade is not evident in the flows,” says Witold Bahrke, Senior macro Strategist for Nordea Asset Management. “Net flows into European and US inflation linked bond funds have actually decelerated and are now slightly negative. This is in contradiction to the general reflation narrative out there. Moreover, there seems to be no evidence of an accelerating rotation out of bonds. On a total level, bonds only suffered negative net flows in November 2016 when the reflation hype was peaking, and jumped back into positive territory afterwards. As the graph illustrates, the odds of a Le Pen victory have a significant impact on European government bond performance (graph). Unless the chances of a Le Pen victory decline markedly, some volatility in flows in and out of Europe should be expected, with an overall negative bias dominating flows. In the government bond space, we therefore continue to favour US over Europe. However, in the absence of an extreme political scenario, there’s no European bond-Armageddon in sight.”

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The data for these findings (unless otherwise stated) are the estimated monthly net flows from Morningstar of all the open-end funds domiciled in Europe. Data provided by Morningstar on 21.03.2017. Since this information is based on estimated flows, the data is subject to change in the future.

About Nordea Asset Management
Nordea Asset Management (NAM, AuM 219 bn EUR*), is part of the Nordea Group, the largest financial services group in Northern Europe (AuM 332 bn EUR*). NAM offers European and global investors exposure to a broad set of investment funds. We serve a wide range of clients and distributors which include banks, asset managers, independent financial advisors and insurance companies.

Nordea Asset Management has a presence in Cologne, Copenhagen, Frankfurt, Helsinki, London, Luxembourg, Madrid, Milan, New York, Oslo, Paris, Sao Paulo, Singapore, Stockholm, Vienna and Zurich. Nordea’s local presence goes hand in hand with the objective of being accessible and offering the best service to clients.

Nordea’s success is based on a sustainable and unique multi-boutique approach that combines the expertise of specialised internal boutiques with exclusive external competences allowing us to deliver alpha in a stable way for the benefit of our clients. NAM solutions cover all asset classes from fixed income and equity to multi asset solutions, and manage local and European as well as US, global and emerging market products.

*Source: Nordea Investment Funds, S.A., 30.06.2017

Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A., Nordea Funds Ltd and Nordea Investment Management AB (“the Legal Entities”) and their branches, subsidiaries and affiliated companies. This document is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. Consequently, the information contained herein will be superseded in its entirety by such Offering Memorandum or contractual arrangement in its final form. Any investment decision should therefore only be based on the final legal documentation, without limitation and if applicable, Offering Memorandum, contractual arrangement, any relevant prospectus and the latest key investor information document (where applicable) relating to the investment. The appropriateness of an investment or strategy will depend on an investor’s full circumstances and objectives. Nordea Investment Management recommends that investors independently evaluate particular investments and strategies as well as encourages investors to seek the advice of independent financial advisors when deemed relevant by the investor. Any products, securities, instruments or strategies discussed in this document may not be suitable for all investors. This document contains information which has been taken from a number of sources. While the information herein is considered to be correct, no representation or warranty can be given on the ultimate accuracy or completeness of such information and investors may use further sources to form a well-informed investment decision. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) with regards to the potential effect of any investment that they may enter into, including the possible risks and benefits of such investment. Prospective investors or counterparties should also fully understand the potential investment and ascertain that they have made an independent assessment of the appropriateness of such potential investment, based solely on their own intentions and ambitions.Investments in derivative and foreign exchange related transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of the investment can greatly fluctuate and cannot be ensured. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. Published and created by the Legal Entities adherent to Nordea Asset Management. The Legal Entities are licensed and supervised by the Financial Supervisory Authority in Sweden, Finland and Luxembourg respectively. The Legal Entities’ branches, subsidiaries and affiliated companies are licensed as well as regulated by their local financial supervisory authority in their respective country of domiciliation. Source (unless otherwise stated): Nordea Investment Fund, S.A. Unless otherwise stated, all views expressed are those of the Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and affiliated companies. This document is furnished on a confidential basis and may not be reproduced or circulated without prior permission and must not be passed to private investors or any investors not covered by relevant regulation. This document contains information only intended for professional investors and eligible investors and is not intended for general publication. This document may not be reproduced or circulated without prior permission. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same, but is included for the purpose of illustration. The level of tax benefits and liabilities will depend on individual circumstances and may be subject to change in the future. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and/or affiliated companies.

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