Investors have been piling money into U.S. bond exchange traded funds at a much faster pace than the equity side of the markets so far this year, despite the recent bout of inflation fears that sent yields soaring and prices plunging.
According to the Investment Company Institute, bond mutual funds and ETFs have attracted $372 billion in net inflows as of June 23, while equity funds brought in $160 billion, the Financial Times reports. Bond funds are now set to eclipse the $446 billion of inflows for all of 2020 and $459 billion for 2019.
Market observers attributed the rising demand for bond funds to the lofty valuations in equities as broad stock indices continue to set record highs. An aging population’s need for steady retirement income generation has also played an important role.
“Financial advisers follow asset allocation models and portfolio rebalancing and demographics are strong trends,” Shelly Antoniewicz, ICI senior director of financial and industry research, told the Financial Times. “The cumulative flow to bond funds lines up nicely with the percentage of the population over 65 years.”
While U.S equities have generated double-digit returns this year, total returns from high-quality government and corporate bonds remain negative in 2021. The bond market was pummeled as benchmark 10-year bond interest rates spiked on expectations that large-scale fiscal and monetary stimulus would contribute to a fast economic recovery and rapid inflation, which would eat away at real yields and push the Federal Reserve to reverse its accommodative stance sooner rather than later.
Meanwhile, financial advisors have urged clients to maintain a balance between equities and fixed income. Periodic portfolio rebalancing has also contributed to selling assets that do well, notably equities, and buying those that have lagged. Additionally, pension plans have been swapping out equities for long-dated bonds to meet the growing needs of retirees.
“Pension plans are today at much better funding levels and it is a prudent strategy to lock in their equity gains and immunise the portfolio against the risk of a large drawdown in stocks,” Mark Vaselkiv, chief investment officer of fixed income at T Rowe Price, told the Financial Times. “We expect a further rotation into bonds from asset allocators.”
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