Eurozone fears in November hit bond fund sales

Mounting fears of a Eurozone sovereign debt crisis in November, particularly in Ireland, bailed out at the end of that month, drew investors away from bonds and toward money market funds

Investors shied away from European bonds in reaction to uncertainty in the Euro area caused by crises in Greece and Ireland.

Net sales of bond funds dropped to EUR8.4 billion from EUR12.8 billion in the previous month, October.

“In November, with the sovereign debt crisis unfolding and developing, this may have hurt investor appetite for bond funds,” said Bernard Delbecque, director of economics and research at the European fund and asset management association (EFAMA), which compiled the results.

Demand for money market funds meanwhile shot back into positive territory, reaching net inflows of EUR4.1 billion, after suffering net outflows of almost EUR-20 billion in October.

Since August 2009, the asset class has been an unpopular choice for investors, having entered positive territory on only one occasion during that period.

In August 2010, money market funds hit sales of EUR16 billion in response to uncertainty about global economic recovery ahead of the Federal Reserve’s decision to begin another round of quantitative easing.

Delbecque said the surge of investors toward money market funds in November 2010 was driven by the perception it could act as a ‘buffer’ against a European sovereign debt crisis.

“One possible interpretation is a ‘flight to safety’, i.e. investors used money market funds as an investment vehicle to park some assets in response to high uncertainty in sovereign debt markets in Europe,” said Delbecque.

Appetite was also propelled by demand within the three centres of money market funds in Europe: France, Luxembourg and Ireland, although in this case mainly the former two.

In December 2010, however, the money market funds are likely to show outflows. “The programme with Ireland was approved, the solution to the problem was found,” said Delbecque in an interview. “The meeting of the European Council in mid-December in Brussels also clarified a number of issues, and a commitment to protect the Eurozone.”

December also tends to follow a cyclical pattern, where money market funds typically see outflows.

While equities declined slightly in November 2010, to EUR8.4 billion from EUR12.8 billion in the previous month, investor demand for the asset class showed ‘resilience’, said Delbecque.

“Investors kept their nerve, this is not nothing,” he said.

Equity funds demand was a good indicator of confidence, he added, explaining the market is driven by worldwide conditions.“The news about investor sentiment is [demand for] equity funds show[s] a positive assessment on the economic outlook for the coming months,” he said.

But for bond funds the outlook remained uncertain, based on how inflation and interest rates develop during 2011.

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