Happier Days Ahead

Mike Zaccardi

STOCK INVESTORS are hanging tough. Bond investors? Not so much.

Citing flow of funds data from EPFR, Bank of America Global Research says investors collectively purchased $195 billion of stocks this year through June 22. The implication: People aren’t panicking. That’s great news, and it supports the narrative that today’s stock investors are less bullied by market volatility.

It’s a different story in the bond market, where we’ve seen so-called capitulation. Bank of America notes that $193 billion of bonds have been sold this year by investors. I’m concerned that many folks have given up on bonds, no longer viewing them as the safe alternative to stocks. Seeing globs of red on bond-fund performance sheets is no doubt discouraging.

But I think this pessimism is overdone. Why? The stock market may be unpredictable, often wandering far from what pundits perceive as “fair value.” By contrast, with bonds, we have a good sense of what future returns will be. If we look at a bond’s current yield to maturity, we more or less know what we’ll earn through price changes and future interest payments. Right now, for example, high-quality corporate bonds yield 4.69%. That’s the highest yield we’ve seen in the past decade.

Your emergency fund is also finally earning a little something. As of Friday, Vanguard Federal Money Market Fund (symbol: VMFXX) was offering a yield of 1.38%. That’ll almost certainly climb through the balance of 2022 as the Federal Reserve continues to hike short-term interest rates. Looking at current market expectations, I anticipate the top money market mutual funds will yield more than 3% by late 2022.

The bottom line: Don’t be swayed by this year’s lousy bond returns. The recent past is a rotten guide to future performance.

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