Here is something from Henry H. McVey, who heads Morgan Stanley’s Global Macro and Asset Allocation.

Before the year ended, he penned a long Investmentfocus piece titled “Managing Risk: Back to Basics.”

I found this chart very informative:


Bond-fund flows at an all-time peak

click for larger graph


Managing Risk: Back to Basics
Henry H. McVey
Morgan Stanley, Global Macro and Asset Allocation
December 2009

Category: Fixed Income/Interest Rates, Psychology, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

27 Responses to “Bond-Fund Flows at an All-Time Peak”

  1. Mannwich says:

    Looks like the public ain’t buying this equities rally……yet. If/When they do, Blanky and friends will then pull the plug….AGAIN.

  2. Steve Barry says:


    The public can’t buy in to the rally like in 1999…they are tapped out…living on food stamps and gov’t checks, with negative equity in their homes and massive credit card bills. They are at very high bullish and record low bearish levels already, per II, and AAII. The above chart is a result of unprecedented gov’t interference with markets, designed to forestall Depression.

    Treasuries will sell off, not because of a rebounding economy, but because the world simply cannot keep buying the flood of supply coming. The chart is scary, because it has to reverse soon and hard.

  3. IdahoSpud says:

    Well that explains the stock market replacement! All that sideline money just pouring into… er bonds.

  4. Mannwich says:

    @Steve Barry: I suspect you are right. I’m sort of in that camp as well.

  5. Steve Barry says:


    Funny…Zerohedge had a piece from TrimTabs the other day, where they were baffled where the stock market rally has come from too. Sideline money is a myth BTW…when a stock is bought, someone else sells…sideline money stays the same.

  6. Mannwich says:

    @Steve: The Fed, perhaps? The Bank of Japan bought its equities over there. Why not the Fed here?

  7. “Sideline money is a myth BTW…when a stock is bought, someone else sells…sideline money stays the same.”

    Well if I have an allocation of 100% bonds or 100% cash and I allocate that money to equities and the person I buy the stock from keeps the same allocation then the demand for equities has increased, yes? So the money sitting in bonds and cash can be seen as the potential increase in demand for equities just as the money in equities and cash can be seen as the potential increase in demand for bonds (as we have seen the increased inflow above). There can be increased debt and equity issuance but that speaks to the supply side.

  8. Steve Barry says:

    @Mannwich: I think you hit it on the head…the Fed or gov’t more involved than usual. They don’t even really have to work hard…just pump futures before the open and let suckers bid up on low volumes during the trading day…all the while, insiders are dumping. Oh this will work out well.

  9. drocto says:

    And, so, what is the point? I compared this graph with the S&P 500 and can see no correlation between extremes or direction of bond fund inflows and extremes or direction of the S&P 500.

  10. dss says:

    If this is the same Henry H. McVey, he has worked for Fortress since June. When did he pen this?

  11. Init4good says:

    drocto @ 12:36
    I had same comparison in my mind and you answered the question. (perf of S&P relative to the chart).

  12. ifish says:

    They are chasing yield…and safety.

    Retail investors that were burned in early ’09 – cashed out – and then missed the run from Mar through Dec 2009 are now chasing yield.

    They are late.

    Tells me that there is more room to run for equities.

    I Fish.


    BR: Chasing yield? Its practically zero!

  13. ToNYC says:

    It appears that the working people, the real tough guys of the economy, have s/canned the financial services industry that sucked their marrow since Ronnie Reagan gave them license. That being said the only real stream of income they believe in is the taxation and confiscation ability of US Government. The working people’s money will come back when the findustry survivors realize the only people at the table are themselves and get a real job.

  14. Steve Barry says:

    Let’s think this through a bit more…we have been in a 28 year bull market in bonds…the gyrations on that chart between 1991 and 2008 are noise. Can bull markets run longer than 28 years? I would tend to think that is pushing it, but yes they could. They would likely end in some kind of earth-shattering, psychologically changing event that drew in the last marginal dollar. That last chart move may be it, or the start of it.

    So what are the ramifications if the bond bull is over and 10 year rates rise for the next 20 years? They have already started to move up, in the face of this chart (which is a bit out of date).

  15. ifish says:

    Depends on how long out you go.

    20 to 30 year.

    Yield up…price down.

    As I said – many got burned big time from 11/2007 through 3/2009…especially from 10/2008 to 3/2009 until they couldn’t take it no longer.

    They wanted out.

    Take a look at the net outflows FROM equity mutual funds during that time period.

    When Mr. and Ms. Main Street comes back – if they come back – where do they go?

    To bonds.

    Safety and yield.

    More room to run for stocks.

    I Fish (do you?)

  16. constantnormal says:

    Does anyone consider bonds to be another example of a “crowded trade”, the way that gold has been referred to, with everyone and his brother/sister/mother piling into that asset class?

    And I’ve gotta wonder at the rationale here — presumably it must be something along the lines of “return of one’s capital” and not “return on one’s capital”. If so, does no one see any risk of widespread corporate/muni/sovereign default?

  17. Jerry 369 says:

    Yeah spot on!The talking head’s will pump their “Mutual fund Monday”slop on Fast Money{Guy is the one to listen to}Shout out Guy,there’s still room on”No Reservation”{Blackfoot trivia},anyway,I still say,at some point this will end.It usually ends badly.We are just to foolish/arrogant to believe that all the problems of the past 20 years are cleansed away and we are all sunshine and lollipop’s!

  18. Ny Stock Guy says:

    BR: Chasing yield? Its practically zero!


    Sure, but it beats the -30% they got in ’08 from their TotalValueGrowthBlendedCapBalancedSelectYield fund

  19. sharkbait says:

    Bonds (funds) not “safe”. Can/will lose $ in bond funds – vs. bonds held to maturity. I wonder if this pt. is lost on the retail investor? MMkt is “safe”, except now, may not necessarily be able to redeem at will:

    Equity MF MM’s mostly all in now, and so that is likely a major source for buying to date. Kinda risky to be buying in from here though IMHO.

    Any asset (bonds incl.) can be a “crowded trade” (DXY carry trade, pork bellies, house prices, etc.) IMHO.


  20. Jerry 369 says:

    ooops……Got so torqued up I forgot my point! The supposed money on the sidelines,just waiting to flood the equity markets,its been going into the bond market. The intel{as stated above}has been going on all year. Almost no inflows{mostly outflows}into equity funds. Now we are to believe all this cash is going to flood the stock markets? Actions speak volumes,this is not happening. As the dollar falls,we will get killed with higher oil/gas/heating costs,etc…Wheres the liberals screaming their asses off? Oil at $80 a barrel,in today’s economy,is insane.If the dollar was stable,oil should be closer to$45/60 a bbl,{risk premey}included….

  21. sharkbait says:

    “If the dollar was stable” – Wow. If pigs could fly. Sound as a pound.

  22. km4 says:

    Jerry 369 Says: We are just to foolish/arrogant to believe that all the problems of the past 20 years are cleansed away and we are all sunshine and lollipop’s!

    “The question then is who is going to finance the U.S. government” Stiglitz said.

    “I wonder if there has ever been a society so badly deluded as ours”….James Howard Kunstler

    The US economy can defined today as super long on fiat, with mixture of and schizophrenic, and mostly dysfunctional going forward unless major structural changes are undertaken.

  23. Jerry 369 says:

    @km4 Agree, I like the quotes,but what causes the break? When no-one,I mean, the word stocks will be looked at with disgust,sickness in the stomach. When the last long throws in the towel,then you buy. This depression could be almost “light”if we let it start in2000{Tech Wreck},now it will get nastier. When you see the union’s not willing to give an inch{state/local/teachers}and an administration cowing to them,well the purge that will come will be violent. De-leveraging “must”occur. The intervention by the fed/treasury will not help,only deepen the hole. Gold isn’t forecasting inflation,its more worried about the depression we are following Japan into. Woe to you who don’t learn from others mistakes! This week will be a great chance for one to be right,bulls or bears.This time next week we will have a greater view of what’s ahead.

  24. JasRas says:


    I am confused by your comments that yields are practically zero… Very few fixed funds are playing that close to the short end, so their yields are higher than that. I also think if you could find a break down into what kind of fixed funds are being bought, you’d see these are not Govt. Income funds… the funds being bought are either “go anywhere” (Pimco tot. ret.) or Corp bond funds, or “Strategic income”, or international bond funds… Don’t know anyone wanting govie funds…

    Another interesting thing that no one seems to be speaking of: Monies are going into “flexible” funds as well as fixed. Investors did learn a lesson; flexibility is a positive trait, not a negative one. The worries about “style drift” killed a lot of people b/c so many prospectus had written in strict investment guidelines after the huge Jeffery Vinnick/George Vanderheiden drift in the 1990′s (when the Magellan fund had a 20%+ position in long term treasuries, remember?). Flexible funds place the decision to overweight equity or fixed in the hands of someone that is supposedly trained to do so… So all this hub bub about equity outflows is slightly overblown. It is big no doubt, but the back out international equity purchases and flexible funds and it isn’t as terrible as the media portrays…

  25. philipat says:

    No surprise to anyone who reads David Rosenberg’s research. There has indeed been a massive “Voting with the feet” away from equities and into fixed income by Joe Public. I agree with Mannwich that as soon as this money has come back into equities (And there IS money on the sidelines from the top 10% who control 90% of the wealth and are relatively unaffected), that is the time that Wall St will engineer the next big correction.

    I don’t know if it’s just me but I find talking about “Bonds” to be confusing. As per the discussion above, there has been an automatic assumption that Bonds=Treasuries. My understanding is that much of the above money which has flowed into “Bond Funds” is, in fact, into Corporate Bond Funds.

    As usual, this trend occured after most of the money was already off the table. These funds continue to preach “Spreads are still high and will narrow”. The danger, from hereonout, IMHO, is that IF Corporate spreads narrow, there is a very real possibility that they will do so only because Traesury yields increase!

  26. JasRas says:

    Good point, philipat! Spreads can narrow because Treas. ylds increase, and interestingly not many get that implication… Just think of where that places treasury bonds if they return to historic spreads with munis…

    CSFB also has a good chart that divies up the money markets between retail and institutional…and surprise, surprise, much of the retail money markets has been re-allocated and is actually at or below ’07 levels. It is the institutional money markets that are flooded with cash! I believe Rosie has referred to this chart, as has Minyanville in the past three months… M Bartels at M.Lynch has too. Retail has made commitments with this money as they can not afford the absurdly low yields. The Intelligentsia however, have either bet against this mkt or are using other methods to participate.

  27. SteveC says:

    The money is flowing into high yield bonds. 56% return this year. Junk bonds have become the new tech stocks. IMO the estimates for default or inflation are too low and these late comers are going to get shafted.