Flows Show That Bond Bears Just Capitulated, Says Bank of America

  • $16 billion inflows into bond funds is the most in 122 weeks
  • Demand for credit cited for mixed signals from stocks, bonds

Citi's Buiter Sees 'Unpleasant' Yields for Years to Come

Investors betting on rising bond yields just threw in the towel in a big way, according to Bank of America Merrill Lynch.

Inflows into fixed-income funds as tracked by EPFR Global totaled $16 billion in the five days ending June 8, the "biggest inflow to bonds in well over two years," according to strategists Michael Hartnett and Jared Woodard. This bond-buying binge came ahead of a calendar jam-packed with event risk that’s so far failed to meaningfully dent risk assets.

A heavy appetite for bonds -- particularly investment-grade credit, which received nearly $10 billion in inflows -- provide a more benign explanation for the apparent disconnect between stock investors’ optimism and the drearier view of the U.S. economic outlook from the Treasury market.

This gap that’s opened up between Treasury yields and the S&P 500 Index over the past month has caused some strategists to worry that equities are due for a dip to resolve the difference between the two asset classes.

But Hartnett and Woodard contend that investors flooding into corporate debt have pressured yields lower, and as a result, "there is no disconnect" between signals sent by the stock and bond markets.

"Lust for credit helps explain why ‘disconnect bears’ [are] frustrated," the duo writes.

The performance of credit and equities are "highly correlated" and both sit near record highs, they conclude.

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