A majority of European investors expect lower inflows into European bond funds in the second half of 2011, according to Fitch Ratings' latest quarterly European fixed income investor survey.

The survey, representing the views of managers of an estimated $4.3 trillion of fixed income assets, showed that 67% of fixed income investors expect a slowing of inflows into European bond funds, which includes 9% who foresee a more dramatic exodus into cash, gold or higher yielding assets.

Monica Insoll, managing director in Fitch's Credit Market Research group, said: "Despite more recent market volatility, the results suggest that investors already had ongoing concerns about fixed income as an asset class."

While 7% thought the slowing of inflows would reverse quickly, 26% expected no significant reallocation of money during this year’s second half. This is in line with the results of Fitch’s January survey, when 68% anticipated a continued slowing of inflows into fixed income during 2011.

"Tactically, fixed-income has become a challenging asset class," said Aymeric Poizot, senior director in Fitch's fund and asset manager rating group. "Government yields are at risk, because of inflation, mainly in emerging markets, and sovereign issues in developed markets. Credit spreads also now move in tandem with equity markets, given the limited room for further compression and the fundamental dynamic being less supportive, with high yield default rates at an historically low level."

As a result, there is a high level of correlation between equity, credit spreads and, more recently, government bonds. This reflects the current general risk-on/risk-off regime and the end of the status of government bonds as risk-free assets. With inflation risk and unconventional monetary policies, investors face low risk/return prospects with bonds and some increasingly turn to currency markets to find safe havens and play global imbalances.

Over the first half of 2011, high yield, emerging markets and global bond funds have seen increased inflows, as investors moved away from funds focused on European debt.

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