The Rush to Safety

We have been talking about this dynamic for over a year now. The public usually rushes into an investment class at precisely the wrong time. For the tail end of 2008 and 2009, that asset class was fixed income.

Bond fund inflows reached record levels in 2009. The story is here.

Full-year inflows to bond funds in 2009, including traditional mutual funds and ETFs, reached a record high of $396 billion, according to a report by research firm Strategic Insight.

Long-term mutual funds, including stocks, bond funds and ETFs, experienced net inflows of $425 billion last year, according to the report.

Taxable bond funds had the highest net inflows in 2009, at $324 billion, followed by equity funds with $75 billion and U.S. equity funds with $6 billion.

Emerging markets saw net inflows of $55 billion; ETFs, $114 billion; and traditional index funds, $54 billion.

“There was a lot of demand for bond mutual funds last year,” Avi Nachmany, Strategic Insight director of research, said in a conference call, noting that the total return for bond funds averaged 17% in 2009.

Returns for the asset class were very good last year as the interest rate environment turned out to be very supportive. This year, not so much so. Rates are rising. I expect them to eventually rise much further. When? As soon as the deflationary forces abate. When will we see that? When credit contraction stops and an economic recovery unfolds. Does that exist now? No way.

Investors hated equities in 2008. They will hate bonds at some point too.