Bond Doomsday Calls Overrun by Bet That Market Will Avoid Rout

Investors are tired of analysts predicting the bottom will fall out of the bond market.

Those who heeded Wall Street analysts’ warnings last year that interest rates would rise and yanked money ended up missing 2014’s 3.9 percent return on a broad index of debt globally. That was the market’s best performance in four years, and many investors aren’t inclined to lose out again.

So individuals are piling back into the debt they’d abandoned even as prices surge and yields plunge once again toward record lows. They funneled $65.4 billion into bond funds in the three months ended June 30, the most since the start of 2013, EPFR Global data show.

Money is flowing toward fixed income in the face of continued predictions for rising interest rates, and falling bond prices. Analysts surveyed by Bloomberg forecast that 10-year Treasury yields will rise to 3.1 percent at year-end from 2.62 percent today.

Investors don’t seem to care too much. After all, listening to such admonitions last year proved to be a mistake in a world lulled into calm by dose after dose of central-bank stimulus. Individuals pulled record amounts of cash from U.S. bonds in 2013 amid a panic spurred by forecasts of rapidly rising yields and big bond losses when the Fed curtailed stimulus.

Easy Money

“People got sucked into this view that rates would be going higher and didn’t think about when rates would go higher or how quickly,” said Peter Tchir, head of macro strategy at Brean Capital LLC in New York. While it would have been better for investors to plow cash into bonds at the beginning of the year, there’s still value in the debt, he said.

All that easy money from central banks has helped wipe away worry that the conflicts in Iraq and Ukraine will disrupt oil exports, causing gasoline prices to rise. And China? Well, growth there seems to be stabilizing, so that looks like less of a wild card.

So, benchmark Treasury yields have declined 0.4 percentage point in 2014 and the money is coming in.

Individuals poured $23.2 billion into junk bond funds and $11 billion into total return debt strategies in the first six months of 2014, according to the data. High-grade bond funds attracted $2.6 billion in the week ended July 2, the second-largest inflow this year, according to Wells Fargo & Co. analysts citing EPFR data.

Just because it’s unclear what could spur yields to rise doesn’t mean they’ll stay low forever. Bonds did lose 2.9 percent in May and June last year amid the height of hysteria about the Fed’s plan to curtail stimulus, a Bank of America Merrill Lynch broad index shows.

For now, investors are more focused on capturing any surprise gains than they are on avoiding a sell-off.

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