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

GLD & HYG ETF:

• The HYG ETF saw its largest ever single-day inflow on Tuesday following dovish Fed remarks

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• Similarly, the gold-tracking GLD ETF saw its largest inflow for the year as inflation expectations surge

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

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 Fridays 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.

Investors Flock to HYG

Data source: Bloomberg

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.

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HYG offers exposure to debt typically viewed as risky but compensates by offering a high return. With the Feds 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.

Data source: Bloomberg

The $696 million inflow into GLD marks the largest over the last year and brings the 2019 total to a net outflow of -$1.2 billion. With gold at fresh highs and the odds of a rate cut soaring, the precious metal could look to drive higher despite the relatively risk-on mood of markets this week. For more ETF analysis and commentary, follow @PeterHanksFX on Twitter.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

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