Do investors reach for yield? Evidence from corporate bond mutual fund flows

Jing-Zhi Huang, Peipei Li, Ying Wang, Yuan Wang, Xiangkun Yao and Licheng Zhang

Journal of Empirical Finance, 2025, vol. 83, issue C

Abstract: This paper investigates the reaching-for-yield behavior of corporate bond mutual fund investors by analyzing how fund flows respond to changes in interest rates. We find that investment-grade (IG) bond funds experience increased inflows following lower interest rates, while high-yield (HY) bond funds show no significant response. Bond fund investors tend to seek higher yields during periods of lower interest rates by assuming greater interest rate risk through the purchase of longer-maturity IG funds, rather than by taking on additional credit risk. Our findings are robust to potential endogeneity concerns and alternative explanations—including investors’ flight-to-safety behavior, liquidity considerations, and fund managers’ skill—indicating that fund flows are primarily driven by investors’ reaching-for-yield behavior in response to expansionary monetary policy. Overall, this study advances the understanding of monetary policy transmission and its implications for financial stability in the corporate bond market.

Keywords: Reaching for yield; Corporate bond mutual fund flows; Investment-grade bond funds; High-yield bond funds; Interest rate risk; Credit risk; Monetary policy; Financial stability (search for similar items in EconPapers)
JEL-codes: E52 G11 G23 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:83:y:2025:i:c:s0927539825000477

DOI: 10.1016/j.jempfin.2025.101625

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