Money flows to bond funds, but risks climb

Nov 25, 2012 @ 12:01 am

By Jason Kephart

There is 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 post $300 billion in inflows this year, outpacing 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, according to Morningstar Inc.

The continuing love affair with fixed income is careering into dangerous territory, said 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 last Tuesday at a press briefing on the firm's investment outlook for next year.

Not only has the historic amount of deposits driven yields down to record or near-record low yields, but the constant demand has led 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 sector, 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.

And if the valuations weren't bad enough, a liquidity problem looms should a big sell-off in bonds occur. The net inventory at primary dealers stood at about $50 billion as of the end of last month, down from $300 billion in 2007.

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

Still, he sees 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, giving bonds a boost.

jkephart@investmentnews.com Twitter: @jasonkephart

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video

INTV

Why some retirement plan advisers think Fidelity is invading their turf

InvestmentNews editor Frederick P. Gabriel Jr. and reporter Greg Iacurci talk about this week's cover story that looks at whether Fidelity Investments is stepping on the toes of retirement plan advisers.

Latest news & opinion

8 apps advisers love for getting stuff done

Smartphone apps that advisers are using in 2018 to run their business more efficiently.

Galvin's DOL fiduciary rule enforcement triggers industry plea for court decision

Plaintiffs warned the Fifth Circuit that Massachusetts' move against Scottrade signaled that the partially implemented regulation can raise costs for financial firms.

Social Security underpaid 82% of dually entitled widows and widowers

Agency failed to tell survivors that they could switch to a higher retirement benefit later.

Is Fidelity competing with retirement plan advisers?

As the Boston-based mutual fund giant expands the products and services it brings to the retirement market, some financial advisers say the firm is encroaching on their turf.

Gun violence hits investment strategies, sparks political debates with advisers

Screening out weapons companies has limited downside.

X

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 investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

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

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print