US bond funds see sharp inflows amid bets of rate cut

(Reuters) - U.S. bond funds racked up solid inflows in the week to Aug. 28 thanks to a robust purchase in government bond funds, driven by bets of a Federal Reserve interest rate cut in September and investor caution over geopolitical tensions in the Middle East.

According to LSEG data, U.S. bond funds witnessed a net $9.58 billion worth of purchases during the week, the largest inflow for a week since July 17.

Traders have fully priced in a cut in September, with a 67% chance of a 25 basis point reduction and a 33% chance of a bigger 50 bp easing, the CME Fed Watch tool showed.

Investors channelled a hefty $5.42 billion into U.S. government bond funds, booking their largest weekly net purchase since Oct. 2023.

They scooped up U.S. short/intermediate government and Treasury funds of $4.84 billion in their largest weekly net purchase since March 2023. U.S. short/intermediate investment-grade funds had $1.89 billion worth of inflows.

At the same time, money market funds secured a fourth weekly inflow in a row, to the tune of about $10.62 billion.

Simultaneously, U.S. equity funds observed a net $2.83 billion worth of sales during the week following net purchases of $6.58 billion in the previous week.

Investors pulled $1.35 billion out of large-cap funds in a partial redemption of $5.33 billion worth of net purchases in the prior week. Mid-cap and multi-cap funds also lost $798 million and $168 million, respectively, in outflows.

Small-cap funds still gained a second weekly inflow, which amounted to $1.03 billion on a net basis.

By sector, investors shed consumer staples, healthcare and utilities sector funds of a notable $528 million, $337 million and $208 million, respectively. The financials sector, meanwhile, gained a third weekly inflow, worth about $783 million.

(Reporting by Gaurav Dogra and Patturaja Murugaboopathy in Bengaluru; editing by Jonathan Oatis)