Global contagion lessons from bond and equity flows

Financial crises are not all created equally. We can take a historic look at the severity of various episodes since the 1990s thanks to fund-flow data from our partners at EPFR - and compare the differing levels of global contagion on equities and bonds.

We created diffusion indices tracking equity funds in 72 markets and bond funds in 85 markets. When the "retrenchment" indices approach 100% in our chart, that means almost all of these countries were seeing outflows at once.

The European debt crisis of the early 2010s, for example, had a greater effect on global equities than it did on bonds (which arguably benefited as relative safe havens); a similar dynamic is seen in the 2020 Covid-19 outbreak. But the 2013 "taper tantrum" episode, when the Federal Reserve said it would scale back quantitative easing, had a much greater effect on bond funds.

The global financial crisis of 2008, meanwhile, saw a similar, globally synchronized impact on both equities and bonds. As the economy recovered in 2010, the retrenchment index declined steadily, and capital flows became regionally differentiated.

We expressed these global trends in another way in our second and third charts, which show the proportion of markets "surging" or "retrenching" at a given moment.

The world-wide equity bull market seen in the mid-2000s stands out in dark green, for instance, as does the "surge" for bond funds in the early 2010s -- when multiple central banks were engaged in quantitative easing. Since 2022, the purple "retrenchment" for bond funds coincides with the inflationary spike and higher interest rates around the world.

Our subsequent charts show how this data can be made more granular -- breaking down the effects on developed-market and emerging-market funds. Generally, EMs tend to be more vulnerable than DMs to capital outflows during crises.

Explore more data and visuals:

EPFR Fund Flows and Asset Allocation

*Our methodology for these charts is based on "Mutual Funds Flows and the Geography of Contagion," a paper published by Damien Puy (now of the IMF) in 2016.

When a country experienced net capital inflows or outflows for at least two consecutive months, it is defined as an "inflow phase" or "outflow phase," i.e. a "surge" or "retrenchment." If net inflows and outflows alternated month by month, that is classified as "undefined," i.e. effectively a neutral period.

When a diffusion Index approaches 1, it implies that the vast majority of sampled regions are experiencing flows in the same direction.