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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.
There is a loophole that allows people to buy more than the allotted 10k a year in I-bonds. (Another 5k if you have a tax refund). My husband and I invest 10k each a year in I-bonds – have been doing so for many years. Plus we pre-pay extra taxes around November and claim 5k back in the form of I-Bonds. That’s 25k a year.
But I discovered an extra provision for buying an unlimited amount of I-Bonds as a gift for a designated person in your account. The money starts accruing interest immediately. The caveat is that that person can only get 10k a year actually allotted to them, which counts towards their annual limit. The rest sits in your gift box accruing interest until it can be gifted.
My husband and I just gifted each other 50k each as I-bonds, which will be adjusted towards our annual quota over the next five years. They are accruing over 9% per annum right now.
There are many youtube videos on how to buy gift I-Bonds explaining the relatively simple process.
I would say many bond investors are getting a wake up call. For the past 22 years bonds have been negatively correlated to stocks, and for the past 40 years bonds have been riding a continuous bull market. The data shows both conditions can reverse for decades. Bond investors took on too much duration risk, and are now paying the price, so of course they are selling. Hopefully they aren’t just going to cash, but instead think about their duration risk during times of both falling and rising interest rates, and adjust their overall bond duration accordingly.
I’m always been confused about the language of inflows and outflows. For example, BOA says that investors purchased $195 billion of stocks. But they didn’t magically appear; weren’t there others on the other side of the table to sell $195 billion of stocks?
On the other side, $193 billion of bonds have been sold. But they weren’t sold into the ether; someone has to be buying the $193 billion of bonds, right?
What am I missing?
Well, they can measure net flows – I imagine by analyzing AUM of certain types of funds (excluding market returns).
seems to me a combo of 5 year notes along with cash is a decent spot for now for the non-stock portion.
Yeah, I have some AGG along with 1-5yr Treasurys as cash. Once money market rates get to, say, 0.50 percentage points of that Treasury mutual fund, then I’ll probably go with the MMF.
I sold the bond fund I held in my taxable account a few weeks ago to “harvest” the tax losses. Plan to buy the same or similar bond fund again after the wash sale time expires.