Investors are amassing an expensive insurance policy against market doomsday.
Confident that fragile economies will keep monetary policy makers in dovish straight-jackets, they poured another US$490 million into the iShares 20+ Year Treasury Bond ETF last week -- bringing its year-to-date inflow to a record US$2.3 billion.
That stocks will suffer as a result of this brittle growth outlook has also helped push three-month trailing inflows into fixed-income ETFs to the highest on record through end-January, according to State Street Global Advisors.
“Fears of worsening economic momentum coupled with geopolitical uncertainties and corporate earnings revisions that appear to have limited upside has triggered a rush for safety,” said Antoine Lesne, head of SPDR ETF Strategy & Research for Europe at State Street Global Advisors. “Fixed income is thus a good place to be relative to higher potential drawdowns in equity portfolio.”
After climbing up along with stocks, Treasury yields reversed course mid-January, signalling the bond market is prepping for slower growth and inflation.
A rally in German bonds pushed benchmark 10-year yields below 0.1 per cent Monday morning to a two-year low on the heels of dimming economic projections.
Investors have added US$18.4 billion into U.S.-listed fixed-income funds this year, nearly as much as they’ve pulled from equity funds -- US$18.9 billion -- according to data compiled by Bloomberg. Though some of those outflows may be down to tax-loss harvesting, it’s the most lopsided relationship between the two asset classes since 2016.
Bonds aren’t rejecting risk altogether, of course: Strong inflows into U.S. high-yield credit persist, even though high corporate debt loads look vulnerable in an economic slowdown.