Investor Appetite for Bonds Hits All-Time High

bondDespite record low interest rates, investors are buying more bonds relative to stocks than ever before. This trend is bound to have big ramifications for the wider markets moving forward.

From the Wall Street Journal:

Emboldened by central-bank stimulus and a hefty price tag on equities, investor demand for bond funds relative to stocks is the highest on record, according to J.P. Morgan Chase & Co.’s analysis of global exchange-traded-fund and U.S. domiciled mutual-fund flows going back to 2007.

Investors have poured $202 billion into global bond funds and withdrawn $47 billion from global equity funds this year, putting stocks on track for their first yearly outflow since 2008, according to the bank.

The shift shows many investors believe global growth and inflation will remain tepid and central banks will keep monetary policy loose—enough to spur greater gains in bonds, but not quite sufficient to push the stock market past the current highs amid lackluster profits and a range of political risks.

Never before in market history have so many investors been so bearish on stocks sitting at all-time highs. In past eras, the desire for bonds would have collapsed, pushing yields higher. Nowadays, with so much central bank intervention, equities, bonds, and precious metals are all rallying in unison, despite big outflows from equity funds.

High valuations aren’t helping attract investment. U.S. stocks are soaring even though companies listed on the S&P 500 are on track to post their fifth consecutive quarter of declines. The trailing price-to-earnings ratio for the S&P 500 climbed to 19.5 this week, the highest since 2010. That compares with a 10-year average of about 15.9.

“The U.S. equity market is confounding everyone’s expectations by reaching new highs, but it has become quite expensive,” said Christopher Mahon, director of asset allocation research at Baring Asset Management.

Bonds are more expensive than ever too, but investors just keep plowing money into them.

The iShares Barclays 20+ Year Treasury Bond ETF (NASDAQ:TLT) closed at $140.08 per share on Friday, up $1.17 (+0.84%). The TLT has gained 16% year-to-date, more than doubling the performance of the S&P 500 in the same period.

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