Money Is Pouring Into Bonds Again. What It Means.

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Investors are pouring money into bond funds—a reversal from a trend seen for most of this year—and it has vast implications for financial markets. 

Last week, a net $7.8 billion flowed into bond funds, according to

Bank of America
.
That is the largest weekly inflow seen in about two months. 

It is a welcome sight. For the entire year, hundreds of billions of dollars have flowed out of all bonds, on net.

That is partly because central banks are removing liquidity from interest rate and bond markets. The reduced demand lowers bond prices and lifts their yields.

The move is a response to high inflation, which central bankers are trying to quell. 

Now, the improving sentiment in the bond market underscores a potential shift in the way people and institutions across the globe are investing.

The 10-year Treasury yield has surged to around 3%, well above average annual inflation expectations for the next 10 years of 2.37%, which means investors can now earn a “real return” on the bond.

With investors finally getting compensated to own safe government bonds, Barron’s points out that the standard “60/40” portfolio, in which asset allocators put 60% of an investors’ money into stocks and 40% into bonds, is coming back. Bonds are once again offering a true hedge against the risk of stocks. 

This also may bode well for the stock market. Soaring bond yields have crushed the stock market this year as they make the potential return on stocks slightly less attractive.

Now, bids for bonds can keep bond yields stable—and that could allow for a bid for stocks. To be sure, earnings expectations could still decline from here, potentially hurting stocks, but stable bond yields would at least limit the potential losses in the stock market. 

The investment landscape is changing—and that is a good thing for the both the stock and bond market. 

Write to Jacob Sonenshine at [email protected]