US bond funds are collecting more money despite fears of inflation

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Net inflows into US bond funds this year far exceeded comparable equity instruments, belittling expectations that inflation fears would undermine the appeal of fixed income investments.

Bond mutual funds and exchange traded funds added $ 372 billion as of June 23, compared with a gain of $ 160 billion on stocks, according to the Investment Company Institute. Annuity funds are well on their way to dwarfing inflows of $ 446 billion in 2020 and $ 459 billion in 2019.

Analysts attributed the popularity of pension funds – which do not hold money market holdings – to concerns about high stock valuations and the need of an aging population for steady income in retirement.

“Financial advisors follow asset allocation models, and portfolio rebalancing and demographics are strong trends,” said Shelly Antoniewicz, ICI senior director, financial and industry research. “The cumulative inflow to pension funds fits well with the percentage of the population over 65 years of age.”

The preference for fixed income came because stocks outperformed bonds. The S&P 500 is up 15.9 percent in 2021, including dividends reinvested, and has the highest value expensive valuation since the Internet boom in 2000.

High quality government and corporate bond total returns remain negative this year. Their performance was hit hard when US 10-year bond market rates rose in early 2021 on expectations that extensive fiscal and monetary stimulus would lead to a strong economic recovery – and higher inflation.

Financial advisors have helped boost bond funds by asking clients to maintain a balance between stocks and fixed income securities. Regular portfolio rebalancing involves selling assets that have performed well and buying assets that have been lagging behind. Pension plans have also switched from stocks to long-term bonds to meet the needs of retirees.

“Retirement plans are at much better funding levels today and it is a prudent strategy to safeguard their equity gains and immunize the portfolio against the risk of a large equity decline,” said Mark Vaselkiv, chief investment officer of Fixed Income at T Rowe Price. “We expect a further rotation in bonds from asset allocators.”

A bright spot in fixed income (total return,%), the high yield bar chart shows that stocks will outperform the bond market by 2021

Erin Browne, portfolio manager for multi-asset strategies at Pimco, said higher interest rates in the US than in Europe or Japan have also been “a strong driver of overseas buying demand for US bonds.”

This year’s US bond flows were split between mutual funds and ETFs. Investors have preferred actively managed funds that can mitigate losses from rising market rates, as well as inflation-linked bonds, floating rate debt and municipal securities that provide tax-free income.

Stock investors have preferred ETFs over mutual funds that have seen outflows this year, according to the ICI.



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