Investors are piling into safe-haven bonds at a record pace, a sign that caution remains despite stocks pushing toward records.
Mutual funds and exchange-traded funds tracking bonds posted $12.1 billion of inflows for the week ended July 17, the 28th consecutive week of inflows. That brings the total so far this year to $254 billion, on pace for a record $455 billion on an annualized basis in 2019, according to a Bank of America Merrill Lynch analysis of EPFR Global data. That compares with $1.7 trillion in bond inflows over the past 10 years, the bank said.
With the Federal Reserve widely expected to cut interest rates for the first time in a decade next week, investors are pondering how many more times officials could lower borrowing costs this year.
“There’s a lot of uncertainty over how many times the Fed will cut rates,” said Jason Ware, managing director and head of institutional trading at broker-dealer 280 Securities. “And when there’s uncertainty, many investors will park their money in something that’s perceived as safer.”
Being long U.S. Treasurys remained the “most crowded trade”—one held by a significant swath of market participants—for the second consecutive month, according to fund managers surveyed by Bank of America Merrill Lynch earlier this month.
Investors are parsing mixed signals on where the economy is headed. Dimmer expectations for global growth have pushed S&P 500 companies to cut their forecasts, pushing the estimated earnings-growth rate for the year to 1.7%, down from expectations of 3% in late March, according to FactSet.
But a recent batch of economic data on employment, consumer spending and industrial production have indicated some strength.
“Investors still don’t see much upside for economic growth, corporate profits or inflation,” said Jared Woodard, global investment strategist at Bank of America Merrill Lynch. “We’re seeing investors allocating to some of the least risky, most conservative parts of the fixed-income market.”
The move into bonds has come even as U.S. stocks have marched to all-time highs. One reason: Corporations have helped support the stock market over the past decade via buybacks, which have contributed in part to a rise in asset prices, Mr. Woodard said.
Mutual funds and ETFs tracking U.S. equities have posted $45.5 billion in outflows year-to-date, BAML said. But rising hopes of rate cuts from the Fed have pushed some investors to take riskier bets recently. The “hemorrhaging” at equity funds has stopped, the firm said, with $22 billion flowing into U.S. equity funds in the past six weeks.
The potential for lower borrowing costs in the near term could prove to be advantageous for stocks. The last five times the Federal Reserve began cutting interest rates outside of recessions—including 1984, 1987, 1989, 1995 and 1998—the S&P 500 rose an average of 11% over the subsequent six months and 16% over the next year, according to LPL Financial.
“Even though fundamentals may not justify the market going much above our 3,000 forecast on the S&P 500, with the Fed tailwind behind us, we’ll ride the wave for now,” John Lynch, chief investment strategist at LPL Financial, said in a research note.
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Write to Jessica Menton at Jessica.Menton@wsj.com
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