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US Retail Investors’ Love Affair With Bonds Continues at Trader’s Narrative

We’ve looked at the secular shift from equities into bonds from several angles. The trend continues unabated as US retail investors shun equities for the most part and rush to buy bonds with wild abandon.

Previously I’ve shared with you the monthly data to illustrate where US retail investors are putting their money. Below you’ll find the cumulative fund flows since January 2007. I chose this slightly different way of looking at the data because it clearly shows the allocation dichotomy between the major asset classes:

cumulative fund flows ICI Mar 20101

The scale of the chart is in millions of US dollars. After a few months of outflows in late 2008, bond funds have enjoyed a remarkably smooth and generous inflow starting in January 2009. So far this month US equity mutual funds have had inflows of about $1.4 billion and foreign funds inflows of $7 billion. Even with the uncharacteristic positive numbers for equity funds, the inflows into bond funds (both taxable and tax sheltered) continues to dwarf everything else at $28 billion. If the trend continues, by the end of the month that will probably be over $30 billion.

This has two interpretations. From a contrarian point of view, it can be used to support the incessant up trend in the market. The retail investor has shunned stocks for the past 3 years and continues to want nothing to do with them. Since the crowd is usually wrong, this is said to be a reason to not second guess the ongoing cyclical bull market.

The other interpretation is to see this as a weakness. Since January 2007 almost $600 billion has been directed to the bond market and $200 billion has been withdrawn from the equity market. How long can this continue without the market being affected? Imagine if the opposite had happened and we had $600 billion inflows into the stock market.

According to the Wilshire 5000 index the total market capitalization of the US stock market stands at approximately $13.29 trillion (give or take a few billion). In that context, $600 billion is a drop in the bucket at only 4.5% of the total market. That implies that this cyclical bull market has been propelled by demand from institutional sources and foreign buyers. US retail mutual funds have historically been a major source of demand but right now the stock market is not firing on all cylinders.

The more this trend continues, the weaker the demand picture will potentially become. After all, global buyers and institutional buyers will have to pick up the pace in other words. Right now, Lowry’s proprietary indicator of investor demand is having no problem climbing higher and supply for stocks is incredibly low and dropping.

This is supported by the fact that, at least, US retail investors are not selling their equity holdings with the same intensity as they are buying bonds. They just seem to be simply ignoring the stock market and re-balancing their total wealth towards bonds. For now at least, fund flows are giving both the bears and bulls plenty of arguments to rationalize their respective positions.

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8 Responses to “US Retail Investors’ Love Affair With Bonds Continues”  

  1. 1 Luvvinit

    Do your equity fund numbers include or exclude ETF’s?

  2. 2 Babak

    Good question. The data is from ICI and I believe it is only for mutual funds, excluding ETFs. Other providers like TrimTabs and Lipper/AMG do provide a breakdown of ETFs and mutual funds.

  3. 3 Andrew

    Wow, I feel quite sorry for those people. They’re investing in U.S. Bonds? Why in the world would they do such a thing? Don’t they know that Treasuries are losing their AAA status?

  4. 4 JAC

    I remember reading an article that shows US investors have very low allocation to treasuries compared to other investors in the world. Thanks to several shocks they received in the last decade, a secular trend to bond allocation has started.

    Japan puts a lot of money in their own treasuries. Similarly we are doing it.

    I think that trend will continue for another 5-10 years or at least until China implodes and stock valuations come back to earth.

    I have lot of confidence in our people to screw up, so it will happen :)

  5. 5 thunderbird

    Could this strange bond allocation data be explained by demographics? I.e. the baby boom?

    If most people with money are retired, or about to retire, then it would make sense to a financial advisor to persuade them to allocate more money to bonds, and less to equities. I’d think a lot of retirees got chewed out for having a high equity exposure in 2007-2008 when they had no reason to do so.

    What percent of this new money is going to guaranteed investments? What percent goes to high-yield instruments? Is it worth it to drill down and look for clues?

  6. 6 dh

    week to 3 / 24 / 10 total equity inflows $6.0B, bonds $5.0B, money market -$3.1B. source: Lipper FMI. YTD US equity flows still negative but retail investor my be dipping toe in the water.

  7. 7 A Reader

    MMFs are not providing any return, so the outflow of $3 billion makes sense. The money has to go somewhere, so why not step up and buy bond mutual funds? Thunderbird is right about looking at more detail.

  8. 8 Abhinav


    Would it be possible for Trader’s Narrative to explain the investments demographically? How many baby boomers still interested in equities or bonds?

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