January 17, 2018 / 8:12 PM / in a year

U.S. investors' love affair with bonds unshaken by rising yields

    By Trevor Hunnicutt
    NEW YORK, Jan 17 (Reuters) - U.S. fund investors stampeded
into bonds and world stocks during the latest week, ignoring
warning signs about stretched prices, according to the
Investment Company Institute (ICI).
    During the week, nearly $17 billion poured into equities,
the most in any week since June. Bonds took in even more cash,
$19 billion, the most on records that date to 2013, according to
the trade group.
    The rush of cash into rising markets shows the resiliency of
bonds, at least in terms of demand from investors, but also
highlights people's more ambivalent relationship with stocks.
    Equities just a week earlier recorded a $21 billion
withdrawal. While they won much of that back during the most
recent week, 80 percent of that money moved into products that
focus on stocks abroad, not in the United States. Domestic stock
funds attracted just $3.4 billion, ICI said.
    "Many investors decided that it made sense to take profits,"
said Kristina Hooper, Invesco Ltd's global market
strategist, referring to the prior week.
    "By the next week it was almost as if investors had done a
180 and were pouring money into equities. The whole time we've
seen fixed income remain popular."
    Demand for bonds has endured yield spikes over the last two
months that pushed long-dated Treasuries' prices down sharply
and led billionaire bond veteran Bill Gross of Janus Henderson
Group plc to declare a bear market in bonds. The 2-year
Treasury yield is at its highest levels in nearly a
decade, breaching the 2 percent mark. The 10-year is
near 2.6 percent, up from 2.1 percent in September.
    Investors responded to that threat by pouring $15.8 billion
into taxable bonds, the most in any week since June 2015, and
another $3.2 billion into municipal bonds, the most on records
dating to 2013, according to the ICI. The data covers mutual
funds and exchange-traded funds (ETFs) based in the United
    "There may not be a lot of difference between stocks and
Treasuries in terms of valuation," said Hooper.
    "We want to be very vigilant because there's vulnerability
in stretched valuations."    
    The following table shows estimated ICI flows for mutual
funds and ETFs (all figures in million of dollars):
               1/10    1/3/2018  12/27  12/20   12/13/2017
 Equity        17,179  -21,006   4,099  -1,584  6,809
    Domestic   3,440   -22,062   1,208  -9,550  5,347
    World      13,739  1,056     2,892  7,966   1,463
 Hybrid        -149    -327      -940   -2,122  -1,415
 Bond          18,916  7,577     4,109  1,599   5,015
    Taxable    15,759  7,063     4,487  1,512   4,943
    Municipal  3,156   515       -378   87      72
 Commodity     -2      -305      -296   -434    5
 Total         35,944  -14,061   6,972  -2,541  10,414
 (Reporting by Trevor Hunnicutt; Editing by Phil Berlowitz)
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