Watch Bond Fund Flows, Not Stock Fund Flows

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James Bianco has run Bianco Research out of Chicago since November 1990. He has been producing fixed income commentaries with a circulation of hundreds of portfolio managers and traders. Jim’s commentaries have a special emphasis on: money flow characteristics of primary dealers, mutual funds, hedge funds, futures traders, banks, and institutional investors.

Prior to founding Bianco Research, Jim spent time in New York as Market Strategist for UBS Securities, and Equity Technical Analyst at First Boston and Shearson Lehman Brothers. He is a Chartered Market Technician (CMT) and a member of the Market Technicians Association (MTA).

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Watch Bond Fund Flows, Not Stock Fund Flows

• The New York Times – Cautiously, Small Investors Edge Back Into StocksParticipation in 401(k) plans held steady in 2008, even as the average account lost 28 percent of its value, according to Hewitt Associates, which tracks retirement plans. More people moved their money into cash or bonds for safety, but they did so at the margins. Over all, the contribution rate dropped less than half a percentage point. And in the first half of 2009, when stocks hit their worst levels and then pivoted higher, only 9 percent of investors made trades in their 401(k) accounts, according to Vanguard. At the same time, alternative investments like real estate have suffered mightily, while interest rates on certificates of deposit or even high-yield savings accounts have plunged, making them less attractive. “Inertia has really ruled,” said Pamela Hess, director of retirement research at Hewitt. “The vast majority of participants have changed nothing — not if they save, not how much they save. Nothing.” Now, some of the money that fled stocks for safe harbors like money-market funds and government bonds last year is beginning to return. Even with trillions still sheltered on the sidelines, some $56 billion has poured into equity funds since April, according to the Investment Company Institute. Of course, making money again can do a lot to bolster anybody’s confidence.

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Comment:

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Which bond funds? The chart below details bond fund buying.

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The real story is the public headlong rush into corporate bond via Corporate bond and strategic income funds (the first and last panels above). Interestingly, when spreads peaked in 2002, the public jumped headlong into high yield bond funds. This time they are avoiding these funds in favor of higher quality corporate bond and strategic income funds. So while they are taking more risk, their aggressiveness has not returned as quickly as 2002/2003.

What have corporate spreads done?

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