Persistent Mutual Fund Flows from Equities to Bonds

The Investment Company Institute has reported another week of persistent outflows from domestic equity mutual funds into fixed income funds. There were some relatively small inflows into foreign equity funds.

Here are the estimated inflows to long term mutual funds for the last four weeks:

Estimated Flows to Long-Term Mutual Funds
Millions of dollars

  7/7/2010 7/14/2010 7/21/2010 7/28/2010
Total Equity -4,228 -3,271 -1,321 -3,845
  Domestic -4,176 -3,235 -1,525 -4,099
  Foreign -51 -36 205 255
Total Bond 6,022 6,138 7,932 7,115
  Taxable 5,043 5,200 6,945 6,128
  Municipal 979 937 987 987

These inflows have been showing up in the price performance of some bond funds. For example, the Third Avenue Focussed Credit Fund (ticker:TFCIX) has been up/unchanged for 25 consecutive days. The last down day was June 30.

Some pundits are calling this a “bond bubble”. But inflating bubbles can last much longer than anyone expects. People started writing about the tech bubble in 1996, but it didn’t burst until 2000. If you sold all of your tech stocks in 1996, you left a lot of money on the table.

Japan has had an inflating bond bubble since 1989. There were people talking about it over ten years ago. But interest rates in Japan have fallen even lower. Japanese bonds have been in a bull market since 1989, while equities have been in a persistent bear market with only a few weak rallies.

A lot will depend on future demographic patterns in the US.

I am long several bond funds and plan to hold them until the trend reverses. Fortunately, bond funds have low volatility compared to equities and you can use fairly tight trailing stop losses once the exit redemption period has passed. Bond funds and bond etfs have a big liquidity advantage over individual bonds for retail investors. The bid asked spread for the individual bonds is often very high in the secondary market, especially for odd lots of less than 100 bonds (or $100,000 par value).

Full Disclosure: Long several bond funds including TFCIX.

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2 responses to “Persistent Mutual Fund Flows from Equities to Bonds

  1. But isn’t a bond bubble constrained by 0% interest rates?

  2. The very short term rates are zero for banks, but many other rates are not. For example, corporates, munis, emerging mkt bonds, high yield are still well above zero.

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