Gold and High Yield Debt Funds See Record Inflows on Dovish Fed

New York (June 8)  Investors hopes for a rate cut from the Federal Reserve surged on Tuesday when Fed Chairman Jerome Powell issued a series of dovish-leaning remarks. The argument for a reduction in the Fed Funds rate was only bolstered on Friday with the release of a weaker than expected Non-Farm Payroll report. Consequently, the S&P 500 and Dow Jones look to rally into Friday’s close. The higher likelihood of a cut resulted in newfound clarity for many market participants and allowed investors to move funds in earnest – resulting in the largest inflow ever for the high yield corporate debt ETF, HYG.

Tuesday’s inflow of roughly $1.5 billion was the largest on record for HYG. It follows last week’s outflows, one of which was the largest in 2019. Further, the $1.5 billion in fresh capital nearly doubled the previous record of roughly $790 million in October. The demand reflects the state of monetary policy and its relationship with risk and return. 

HYG offers exposure to debt typically viewed as risky but compensates by offering a high return. With the Fed’s dovish remarks, the benefit of holding effectively risk-less US treasuries was dented while the outlook for beleaguered companies was bolstered – as money looks to remain cheap or become even cheaper. That shift has increased the attractiveness of HYG – thus the inflow. 

Gold Price and GLD Shine
At the same time, a dovish Fed has riled inflation expectations. While central bank officials have stated they will not hike rates to curb trade war-related inflation, the prospect of rate cuts increases future inflation expectations nonetheless. As a key hedge against inflation, gold spiked to fresh 2019 highs and the gold-tracking GLD ETF saw its largest inflow for the year.

DailyFX