Feb 12, 2020 - Economy & Business

Gentlemen (and ladies) prefer bonds

Illustration: Aïda Amer/Axios. Photo: Sunset Boulevard/Getty Contributor

After pouring record inflows into bond funds last year, investors are doing so at an even faster pace in 2020 — pushing 10 times more money into bonds than stocks.

By the numbers: More than $65 billion has flowed into bond funds this year, according to Lipper Refinitiv data provided to Axios, outpacing inflows through 2019's record pace when bond funds took in $316 billion.

Why it matters: As of Tuesday's close the S&P 500 had made 10 record highs in just six weeks this year and has risen and held above 3350, a level many investment managers targeted in their 2019 end-of-year outlooks.

  • The Nasdaq made its 12th record close Tuesday, but investors still don't seem to want equities, as stock funds have seen just $5.7 billion of inflows, year to date.

What's happening: Experts tell Axios that a confluence of issues are behind the bond-buying binge that has elevated purchases of investment-grade corporates and U.S. Treasuries over equities despite the stock market's strong performance.

  • Price-to-earnings ratios on U.S. stocks are at historically high levels, and traders continue to brace for a downturn, especially with worries growing over the novel coronavirus outbreak.
  • A growing number of baby boomers are switching their allocation to safer assets like fixed income as they near and enter retirement.
  • Foreign buyers — especially from Japan, which is the top overseas holder of U.S. government debt — have increased buys since a September decision allowing pension funds to buy U.S. and international debt.

Yes, but: When removing equity mutual funds, the allocation to stocks so far in 2020 is significantly higher. Investors have been moving out of higher-cost mutual funds and into low-fee (and even negative-fee) ETFs for years.

  • Equity ETFs have seen $38.5 billion of inflows this year.

Still, that number is only a bit more than half the bond fund inflow total, and bonds have seen a much higher volume of flows to funds excluding ETFs ($47.7 billion) than to ETFs ($17.9 billion).

The big picture: Thanks in no small part to the Fed holding interest rates at historically low levels and continuing its bond-buying program, investors have piled into debt over the past two years.

  • More than $382 billion has flowed into bonds since the start of 2019, Lipper's data show, while $191 billion has flowed out of equity funds.

Fun fact: Since 2010, more than three times as much money has flowed into bonds as into stocks — $1.5 trillion vs. $428 billion.

  • During that time, the value of stock funds held by investors has gone from $5.7 trillion to $14 trillion, while the value of bond fund holdings has gone from $2.7 trillion to $5.7 trillion, per Lipper. This is largely because equities have outperformed bonds by so much.

Go deeper: A historic fortnight of bond buying

Go deeper

Foreign governments continue to shun U.S. government debt

Illustration: Aïda Amer/Axios

Foreign private buyers continue to pile onto U.S. government debt while foreign governments again pulled money out, led by China.

What it means: The U.S. Treasury International Capital Report showed a net inflow of $78.2 billion — $134.2 billion of foreign private inflows and net foreign official outflows of $56 billion.

The market is already pricing in a U.S. recession and QE from the Fed

Data: U.S. Treasury; Chart: Axios Visuals

The U.S. fixed income and Fed fund futures markets are not only pricing in a U.S. recession and the Fed cutting interest rates to zero, they are now pricing in quantitative easing and asset purchases, analysts tell Axios.

What's happening: After U.S. 10-year yields fell to 0.32%, their lowest level on record, and yields on the 30-year bond dropped to 0.72%, investors began pricing in a bond-buying program from the Fed that would target longer-dated Treasuries.

Established VCs turn to "super angels" to grow their network

Illustration: Eniola Odetunde/Axios

Thanks to companies like AngelList and Carta that make it easier than ever to set up small VC funds, a new generation of so-called “super angels” is cropping up — and established venture funds are backing them.

Why it matters: Just like the boom in scout programs a number of years ago, it’s all about the deal flow.