Morningstar said Tuesday that May was another strong month of mutual fund inflows: Investors added $38.6 billion into long-term funds, excluding figures for money-market and fund of funds, as well as ETFs.
Taxable-bond funds stayed ahead of the pack with $21 billion in flows.
Investors, who embraced core, intermediate-term bond funds in 2012, are increasingly turning to less interest-rate-sensitive bond sectors and are shunning government bond sectors, according to Michael Rawson, CFA.
In May, interest rates spiked, with the 10-year Treasury rate increasing by nearly half a percent to 2.16%. At the same time, the Barclays Aggregate Bond Index fell 1.78%.
Investors took profits in U.S. equity funds in May “but continued their love affair with emerging-markets stocks,” says Rawson.
Municipal-bond funds experienced net outflows for the third month in a row. Meanwhile, money-market funds (also tracked by Morningstar) grew by $27 billion—their first monthly inflow of 2013.
In May, the improving economy and jobs report led to the conclusion that the Fed may ease up on quantitative-easing measures. Flows into the intermediate-term bond category weakened but were positive for the month—and did not turn negative until early June.
In May, it was nontraditional-bond and bank-loan funds that took in the largest share of flows, according to Morningstar.
The PIMCO Total Return Bond had strong outflows. But PIMCO Unconstrained, the largest fund in the nontraditional category, gained more than $1 billion in flows, as did JP Morgan Strategic Income Opportunities.
The bank-loan category also attracted strong inflows, led by Oppenheimer Senior Floating Rate with a $700 million haul. (The fund rose 0.24% in May and 3.54% during the first five months of 2013.
The rise in rates did not sit well with equity investors in May.
“While the S&P 500 was up 2.34% for the month, yield-oriented sectors such as REITs and utilities each lost more than 6%, according to Morningstar sector indexes,” Rawson said.