October 5, 2017 / 11:41 PM / a year ago

UPDATE 1-Glimmers of 'reflation' trade in U.S. funds, but no love for stocks

 (Adds details on mutual funds and ETFs, analyst quote, table,
    By Trevor Hunnicutt
    NEW YORK, Oct 5 (Reuters) - The Trump administration's
highly anticipated tax plan spurred modest flows into funds that
profit from higher interest rates and inflation, Lipper data
showed on Thursday, but that resurgent "Trump trade" did not
boost stocks.
    The White House outlined a proposal last week that would
provide $5.99 trillion in tax cuts, according to the first
detailed analysis of the plan by the non-profit Washington-based
Tax Policy Center.
    "If they can get this tax plan passed it would revive
inflation because we would get growth," said Pat Keon, senior
research analyst for Thomson Reuters' Lipper research unit.
    The arrival of a plan that could swiftly boost corporate
profits was not enough to galvanize reticent investors to buy
stocks. U.S.-based equity mutual funds and exchange-traded funds
(ETFs) posted $1 billion in outflows during the week ended
October 4, according to Lipper, curbing withdrawals of $9.7
billion the week prior.
    But fund flows showed flashes of the "reflation," or
"Trumpflation," trade that drove financial markets after Donald
Trump's surprise U.S. presidential election victory last
November. Trump's promised tax overhaul initially sparked
predictions that debt-fueled economic growth and inflation could
rise, pushing the U.S. Federal Reserve to accelerate interest
rate hikes.
    Bond funds invested in government debt that pays out more
when inflation rises - which include Treasury
Inflation-Protected Securities, or TIPS - attracted $432 million
during the week, the most since March. Loan-participation funds,
which buy debts that yield more as rates rise, attracted $369
million, the most since June. And financial sector funds pulled
in $1.4 billion, marking the largest week of inflows since July,
according to Lipper. Banks can earn more in interest from
customers when rates are higher.
    Yields on 30-year benchmark U.S. government bonds
 rose from 2.77 on September 26 to 2.89 on Thursday.
And the Fed has signaled an expectation to raise the federal
funds rate it controls one more time this year.
    Rate-sensitive Treasuries and real estate posted outflows
during the week. The government bond funds posted $270 million
in withdrawals, while the real estate sector funds posted $524
million in outflows, the most withdrawn since June, according to
Lipper. Safe-haven precious metals commodities funds posted $333
million in withdrawals, the first week of outflows since August.
    Overall, taxable bond funds attracted $4 billion during the
latest week, marking a 13th straight week of inflows, Lipper
data for U.S.-based funds showed on Thursday.
    The following is a breakdown of the flows for the week,
including mutual funds and ETFs:
 Sector                    Flow Chg  % Assets  Assets     Count
                           ($blns)             ($blns)    
 All Equity Funds          -1.020    -0.02     6,444.525  12,184
 Domestic Equities         -1.417    -0.03     4,416.035  8,671
 Non-Domestic Equities     0.398     0.02      2,028.490  3,513
 All Taxable Bond Funds    4.010     0.16      2,576.039  6,068
 All Money Market Funds    -3.862    -0.15     2,590.225  1,067
 All Municipal Bond Funds  -0.140    -0.04     397.823    1,468
 (Reporting by Trevor Hunnicutt; Editing by Jennifer Ablan and
Cynthia Osterman)
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