Even with the roaring start to 2019 that has the S&P 500 Index up nearly 16% through Thursday, an increased appetite for fixed-income strategies suggests the emergence of a more conservative mindset among investors.
While the first three months of the year saw investors drive $136 billion worth of net flows into mutual funds and exchange-traded funds, bond funds carried the load, according to Morningstar Inc.
In March alone, taxable bond funds had $35.3 billion worth of net inflows and municipal bond funds had $8.8 billion in net flows.
By comparison, U.S. equity funds had $6.2 billion in net inflows during the month, and international equity funds had net flows of $1.3 billion.
In March, all the Morningstar categories combined had $44.1 billion of net inflows, but there were net outflows from sector equity funds ($3.6 billion), allocation funds ($3.5 billion), alternative funds ($385 million) and commodity funds ($71 million).
"The broader theme here is that we're deep into a bull market and we might be seeing some financial advisers and institutional investors de-risking portfolios," said Morningstar analyst Kevin McDevitt.
Muni bond funds, which have seen nearly $28 billion worth of net inflows over the past 12 months, had their best quarter for net flows since the third quarter of 2009.
Muni bond funds suffered nearly $8 billion in net outflows during the fourth quarter, which offset most of the inflows seen over the two prior quarters, which means the nearly $28 billion in inflows over the past year was almost entirely the result of the first quarter of this year.
Mr. McDevitt attributed the increased allocation to bonds as a reaction to the narrowing of the yield spreads between some longer-term and shorter-term bonds.
"The spread has narrowed a bit as people have been responding to that spread," he said. "It was a valuation play, but the move into bonds is also expected with all the talk of higher taxes to come by certain presidential candidates."
The shift toward fixed income looks even more extreme when it comes to actively managed funds. In March, every active equity category suffered net outflows totaling $28.8 billion. Over the same period, active taxable bond funds had net inflows of $16.2 billion and active muni bond funds had net inflows of $7.5 billion.
Vance Barse, wealth strategist at Manning Wealth Management, attributed at least part of the migration toward bonds to "skittish" investors following the pullback in the fourth quarter, which saw the S&P drop more than 13%.
He linked the interest in muni bonds with the new tax laws.
"The 2019 tax season was an eye-opening one for many high-income earners, particularly in states like New York and California, given the $10,000 state and local tax deduction cap," Mr. Barse said. "We've seen a newfound appetite for municipal bonds given their tax-equivalent yield."