Back to Chasing Bonds

Investors are back to doing what they do best this month – running after the thing that’s getting away from them, regardless of whether or not it’s in their best economic interest to do so.

Here’s Yuriy Shchuchinov from Bank of America Merrill Lynch’s Credit Strategy team:

Screen Shot 2014-05-30 at 1.51.49 AM

As interest rates continue to decline, mutual fund and ETF investors continue to
buy bond funds in the typical fashion of flows following returns. Hence, over the
last four weeks as 10-year Treasury yields declined 20bps (Figure 1), inflows into
fixed income funds totaled $19bn. Stocks, on the other hand, saw $7bn in
outflows over the same period, suggesting some reverse rotation out of stocks
and into bonds.

Assuming 2% inflation minimum over the next ten years, investors are essentially handing their investment capital over for a near-zero return – and that’s if they’re lucky and rates don’t rise anytime soon. How much of this buying comes from a desire to produce the optics of “having gotten it right”?

Or is everything just a trade these days, with no expectations beyond the next week or month’s performance?

Hard to tell.

In the meantime, the phrase “flows follow performance, not value” – a theme we discuss here all the time – is in full effect.


Situation Room: More Buying of Duration
Bank of America Merrill Lynch – May 29th 2014

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