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

Abstract

This paper studies the role of mutual fund yield in driving investor flows and performance of bond funds. Using two common measures, the SEC yield and 12-month distribution yield, we find strong evidence that investors tend to chase bond funds with higher yields, even after controlling for total fund returns and fund ratings. Although bond funds with higher yields achieve higher average total returns, the return spread is less than one half of the yield spread, and is attributable to higher fund risk. We also show that high yield bond funds suffer sharp losses during crisis periods, which trigger large outflows.