INsider: Bond fund bubble now the size of a zeppelin

Morningstar issues warning about 'staggering' inflows into taxable debt funds
MAR 13, 2012
Investors continue piling into bond funds, but Morningstar Inc. editorial director Kevin McDevitt wonders if the flows are evidence of a bond bubble. Last month, open-end funds overall saw their strongest inflows in two years, but the majority of the money is going into bond funds. Indeed, taxable bond products received $28 billion of the estimated $44 billion in total inflows during February. "Taxable-bond funds: Spot the bubble," Mr. McDevitt wrote in a fund-flow update today. "Taxable-bond funds have dominated mutual fund inflows for years, but the cumulative effect is staggering," he wrote. Taxable bond assets have more than doubled since the end of 2008, increasing to $2.1 trillion from $1 trillion, Mr. McDevitt wrote. Over the same period, U.S. stock funds lost about $200 billion through outflows, "despite the fact that the S&P 500 Index's return during that time was about three times the gain on the Barclays Capital U.S. Aggregate Index," Mr. McDevitt wrote. Investors may be responding to the stock market rally, sort of. Outflows from U.S. stock funds last month were $1.2 billion, the smallest net outflow in 10 months. "With the S&P 500 Index up about 9% so far in 2012, investors may be starting to warm to the strongest rally to begin a year since 1998," Mr. McDevitt wrote.

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