Something odd is taking place in the bond world.
On one hand, hedge funds are becoming increasingly jittery about bond prices, and as we showed over the weekend when we demonstrated the record surge in short interest in the LQD, the largest investment grade corporate bond ETF, the bets on declines in corporate bonds are aggressively piling up, even if said price declines have yet to emerge.
On the other hand, inflows into corporate bond funds have continued to grow, and as Bank of America observed last week, inflows to US fixed income funds and ETFs accelerated to $5.71bn from $1.90bn the prior week, driven by improvement in high grade flows.
The bank added that US High Grade funds and ETF inflows rebounded to $4.46bn – the strongest week since the week ended 11/1/17 – from $2.00bn a week earlier, and that inflows more than double for both HG funds and ETFs. Short-term HG inflows jumped, ex-short-term inflows also accelerated.
Today, we get another confirmation of just how massive the flow back into bonds has been courtesy of TrimTabs, which writes that demand for bond funds has exploded in January after moderating in November and December.
Specifically, the inflow of $38.2 billion into bond MFs and ETFs this month through Thursday, January 25 is on track to be the highest since October 2009, driven by an estimated inflow of $32.3 billion into bond MFs.
As TrimTabs further notes, bond funds had negative returns in four of the past five months, so “their popularity amid lackluster performance should concern contrarians.”
This is not, however, to say that there is some rotation out of stocks and into bonds. According to TrimTabs data, global equity funds inflows also have accelerated dramatically in January and the inflow of $33.4 billion into global equity MFs and ETFs this month is on track to be the most since April 2015.
In other words, January was one of the euphoric months where there was a broad panic to “buy everything”
As with bond funds, retail investors have been driving much of the buying. The estimated inflow of $15.8 billion into global equity MFs this month is set to be the most since July 2015.
Finally, breaking down the flows, U.S. equity ETFs are drawing huge inflows for a fourth consecutive month. This month’s inflow has reached $30.0 billion and is on track to be the most since December 2016, and the inflow from October to January of $112.0 billion is on track to be the second-highest four-month inflow on record. Buying of U.S. equity ETFs this month has been offset by redemptions of $22.2 billion from U.S. equity MFs, which are suffering a thirty-fifth consecutive monthly outflow.
In other words, either bond or stock investors are right, and unfortunately for risk parity funds, the two can no longer be correct at the same time, unless of course there is a coordinated selloff in which case everyone is looking at substantial losses.
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