Beware of Chasing Yield: Bond Fund Yield, Flows and Performance

Abstract

This paper establishes bond fund yield as an important driver of fund flows. Using the SEC yield and 12-month distribution yield, we find that investors tend to chase high yield bond funds after controlling for fund returns and ratings. The tendency of yield chasing is stronger in environments with low interest rates and following monetary policy easing. High yield bond funds have higher average returns, attributable to higher fund risk. During the crisis episodes, high yield bond funds suffer sharp losses and experience large outflows. These results have important implications for financial stability.

Keywords: Bond Fund, SEC Yield, Distribution Yield, Flows, Performance

JEL Classification: G10, G11, G12, G23