Mutual Fund Flows and Government Bond Returns
40 Pages Posted: 10 Jun 2021 Last revised: 22 Feb 2022
Date Written: January 31, 2022
We investigate daily flows to Israeli government bonds mutual funds, which are held primarily by retail investors. We divide the bonds into six categories: nominal/CPI-linked; short-term, intermediate-term, and long-term maturity. We find that daily net flows are contemporaneously correlated with price changes of all categories. These price changes are economically significant and they subsequently reverse fully or mostly within 10 trading days. The price reversal indicates that the initial price changes are due to “noise.” We also find that these price distortions affect break-even inflation—a popular measure of inflation expectations. Our findings indicate that even securities that are held by institutions and professional investors are affected by retail sentiment.
Keywords: Investor sentiment, government bonds, mutual fund flows, break-even inflation
JEL Classification: G12, E43
Suggested Citation: Suggested Citation