Tags: bond | fund | stock | bubble

Experts: Stay the Steady Course With Bonds

By John Morgan   |   Tuesday, 02 Jul 2013 12:20 PM

A tidal wave of money has come out of bond funds since the Federal Reserve hinted at an eventual tightening last month — in fact it's a record that's nearly 50 percent higher than the previous monthly high set in 2008 — but the cash outflow is not headed into stocks.

TrimTabs Investment Research estimated that of the more than $61.7 that fled out of bond funds and related exchange-traded funds through June 24, only $400 million — less than 1 percent — moved to equities.

"That money is not going to stocks, it's going into bank products and money market funds, even if investors don't think they will get any real return there," said TrimTabs CEO David Santschi, according to MarketWatch.

Editor's Note:
Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

"Bond money for most investors is considered their safe money; even if they don't understand the risks they believe that what they can't afford to lose they put into bonds, and while they might not be happy with a loss in a stock fund, they won't even tolerate the thought of a loss in their bond funds."

Michael Gayed, chief investment strategist at Pension Partners, said the current bond rout has been an over-reaction. "While there is a concern that bonds are over-valued — that there is a bond bubble — it's not really a bond bubble unless you have an end to deflationary forces."

MarketWatch said there is actually no end in sight to deflationary forces, at least for the rest of 2013 if not for much longer.

"Is it scary how much the Fed is driving this market? Absolutely. But does that mean the average investor should be rushing to sell all of their bond funds? I don't think so," Santschi said.

"If you're careful, there is never a reason to panic, but there is really no reason to panic right now, and you're not going to help yourself if you see all this money leaving bond funds and you just think 'They're all going so I have to get out too.'"

Last week, the broad selloff in fixed assets has been a particular burden in the municipal bond debt market, forcing some sales to be delayed or canceled, The Financial Times. The global tone of the general bond selloff could potentially threaten bank funding.

The Wall Street Journal reported the bond fund outflows are being heightened by the unwillingness and inability of banks to step in and provide liquidity, according to asset managers.

Investment banks have often taken bonds on to their books until they could find a buyer, but new bank regulations have made it very costly for them to fill that role in the current markets, The Journal said.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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