InvestmentNews INsider

The INsiderblog

InvestmentNews reporters offer their take on intriguing or controversial articles from around the web.

Bond fund rush: Send in the clowns?

On pace for $300B in inflows this year as risks continue to rise; could get caught in mid-air

Nov 21, 2012 @ 10:12 am

By Jason Kephart

There's no slowdown in sight for the great bond-buying spree as its fourth year draws to a close and the risks continue to pile up.

Bond funds are expected to take in $300 billion in inflows this year, outpacing both 2011 and 2010, according to research firm Strategic Insight. Investors have poured more than $1 trillion into the asset class since 2009, doubling the total assets in bond funds to $2.4 trillion.

Investors' allocation to bonds, which includes both mutual funds and exchange-traded funds, has climbed to 26%, double what it was in October 2007, when the stock market reached its peak, according to Morningstar Inc.

The continuing love affair with fixed income is careening into dangerous territory, warned Michael Gitlin, director of fixed income at T. Rowe Price Group Inc.

“Fixed income is more risky than at any time in the last few years,” he said Tuesday at a press briefing on the firm's investment outlook for 2013.

Not only has the historic amount of deposits driven yields down to record, or near record, low yields, but the constant demand is also leading to a decrease in the quality of credits being issued.

This year, investment-grade credits have seen more downgrades than upgrades for the first time in three years. In the high-yield space, the upgrades and downgrades have canceled each other out after two straight years of net upgrades.

“You're getting all-time low yields for more credit risk,” Mr. Gitlin said. “There are really stretched valuations in fixed income right now.”

And if the valuations weren't bad enough, there's also a looming liquidity problem should there be a big sell-off in bonds. The net inventory at primary dealers stood at around $50 billion as of the end of October, down from $300 billion in 2007.

“There's no backstop to buy when everyone is trying to sell,” Mr. Gitlin said.

Still, he does see some bright spots in local-currency emerging-markets debt.

It hasn't seen as much of a run-up as dollar-denominated debt, and with the dollar in a secular bear market, according to Mr. Gitlin, the local currencies should appreciate against it in the future, giving bonds an extra boost.


What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video


The #MeToo movement and the financial advice industry

Attendees at the Women to Watch luncheon commend the #MeToo movement for raising awareness about the issue of sexual harassment and bringing women together.

Latest news & opinion

DOL fiduciary rule likely to live on despite appeals court loss

Future developments will hinge on whether the Labor Department continues the fight to remake the regulation its own way.

DOL fiduciary rule: Industry reacts to Fifth Circuit ruling

Groups on both sides of the fiduciary debate had plenty to say.

Fifth Circuit Court of Appeals vacates DOL fiduciary rule

In split decision, judges say agency exceeded authority.

UBS, after dumping the broker protocol, continues to see brokers come and go

The wirehouse has seen 14 individuals or teams leave and five join for a net loss of $2.4 billion in AUM

Merrill vets ready to recharge breakaway recruiting efforts

After regrouping in wake of broker-protocol exits, Snowden Lane Partners is ready to recruit wirehouse brokers and RIAs.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print