Comment

We last detailed our laundry list of bond haters earlier this year. The list is long and includes some very impressive names. We have also highlighted the table below which currently shows 88% of economists surveyed (71 of 81) expect higher rates in the next six months. Back in May, when the 10-year was 2.40%, 100% of economists surveyed (64 of 64) thought rates would be higher in six months. As of this writing the 10-year is at 1.75% and November is just two weeks away.

Despite this bearishness, many investors are still throwing money into bond mutual funds. The chart below bears this out. The second panel in blue shows continued outflows from all stock funds while the third panel in green shows hefty inflows into all bond funds.

The bears will often scratch their head at these flows and assume the public is making a huge interest rate bet. However, this is not necessarily the case.

As the chart below shows, the public’s inflows into bond funds peaked in March 2010 and has since pulled back significantly. Of the $261.15 billion in flows into bond funds over the past year:

Over half of these flows ($146.86 billion) are going into credit focused funds. This group includes corporate bonds, high yield, and strategic income.
Flows into muni and world funds (bottom panel in blue), which are tax plays or currency bets, are getting another $49.19 billion of the public’s flows.
The pure interest rate bet of government and mortgage funds are getting less than 25% of all inflows ($65.11 billion). These funds were getting outflows less than a year ago.

Add it up and we do not see a big interest rate bet being made by the public. We see tax plays, currency bets and a big bet in corporate bonds, which can also be described as a low-beta stock market bet.

Treasuries are bought by the Chinese central banks, the Japanese central bank, the Federal Reserve, and dealers/banks capitalizing on carry trades thanks to the Federal Reserve’s 2014 low-rate guarantee. That’s it! Because the Federal Reserve is unlikely to take back this low rate pledge, we do not expect this list of buyers to drastically change over the next couple years.

So what hurts the bond-buying public? Since they are making a big credit bet, one could argue a big correction in equities that dramatically widens credit spreads would be more harmful than a rise in interest rates.

Source: Bianco Research

Category: Fixed Income/Interest Rates, Think Tank

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.

6 Responses to “Everybody Hates Treasuries”

  1. eroldictat says:

    Your last point is spot on – investors piling into credit funds could easily get walloped if we get an equity correction. Thing is, they could also get smacked if things go the other way and the Fed starts to back away from further QE and/or its zero rate pledge. Credit is priced to perfection and needs a goldilocks scenario to keep rallying. Last point — the credit markets have very spotty liquidity — this has been the case since 2008-09 as dealers are no longer providing real liquidity. The recent one-way buying rest from etfs and mfs has masked the fact that the door will be very, very small if anyone tries to leave this trade. Watch out.

  2. streeteye says:

    If you buy a 10-year at 1.8%, and the rate goes to 0, you’ll make 18% (1.8 x 10). And the Fed has explicitly set a 2% inflation target and said they’ll keep on doing QE as long as it takes. So, one would hope people aren’t making a big interest rate bet.

  3. Moopheus says:

    Higher rates better for savers, though. If rates rise, that means the bonds can be bought relatively cheap and held to collect interest.

  4. [...] Investors are betting on credit as much as they are continued low rates.  (Big Picture) [...]

  5. Futuredome says:

    More people who don’t get. If the FED stops QE, 10 year goes to 0. Got it? The only reason it has risen a bit since “QE3″ is because of QE3. QE3 is a very small program.

  6. yuan says:

    “If you buy a 10-year at 1.8%, and the rate goes to 0, you’ll make 18% (1.8 x 10).”

    If you buy at 1.8% and sell at 0.9%, you’ll make 100%. (See Japan.)