Despite record-low yields, savers and ultra-conservative investors have been piling into bond funds ever since the stock market puked its brains out in 2007/2008.
Call it a knee-jerk flight to safety, or a follow-the-Fed strategy, it’s undeniable that investors are collectively hiding in the herd, amongst roughly $1.1 trillion worth of inflows since 2007.
Meanwhile, equity funds have been hemorrhaging as skittish stock investors – already burned once in 2008… or perhaps twice in 2000 and 2008 – collectively withdrew their capital.
Here’s a chart showing the cumulative flow of funds going into bonds (red) and out of equities (blue).
Many pundits have dubbed the pending reversal of this trend, whereby investors will yank funds from bonds to reinvest in stocks, the “Great Rotation.”
$172 billion was redeployed into equity funds between January and October this year, a recent data release shows. That’s the largest influx of capital destined for stock purchases in the last 13 years!
Meanwhile, bond fund redemptions have become the trend ever since May, when a sudden spike in interest rates sent the value of bond funds tumbling. And the scary part, for bond investors, is this is just the beginning.
Interest rates moving off zero is a “when, not if” scenario. With nowhere to go but up for interest rates, there’s nowhere to go but down for bond funds.
Of course, incoming Fed chair Janet Yellen is already trumpeting her intentions to keep rates low… so don’t expect a mass exodus from bond funds just yet.
Still, there’s little wisdom in buying bonds today. The stock market remains the best game in town right now.