by Jared Cummans on August 6, 2010
After lingering in the background of the ETF industry for the last several years, fixed income funds have stepped up in recent months to become one of the primary drivers of growth. Through the first seven months of 2010, cash inflows to ETFs totaled $49 billion. Of this amount, more than $23 billion has been attributable to fixed income ETFs, reflecting that investors have become increasingly comfortable with the idea of achieving their fixed income exposure within the ETF wrapper.
The movement to bonds has also come at a time when equity market uncertainty and volatility has surged. With uncertain prospects for economic growth, the safe haven of fixed income securities has new appeal; it’s not uncommon now for even the most risk tolerant investors to have bond allocations approaching 50%.
Tremendous innovation in the fixed income ETF space has given investors more options than ever before. Once upon a time, most fixed income ETFs were broad-based funds that covered the entire universe of (or at least investment grade universe). But new products, such as target date funds rolled out by iShares and Claymore, have allowed investors options for increased granularity in constructing fixed income exposure [see Claymore Launches Maturity Date Corporate Bond ETFs].
According to our ETF screener, there are currently about 120 fixed income ETFs, a huge increase from just one year ago. The exposure offered by these ETFs is all over the board, ranging from Treasuries to municipal bonds to “junk” bonds. Below, we break down the bond ETF space into 12 different ETFdb Categories [for more ETF insights, sign up for our free ETF newsletter]:
California Munis
The California Munis ETFdb Category includes funds holding bonds issued by various municipalities, including cities, counties, airports, school districts, and any other government entity below the state level in California. Given the Golden State’s ongoing financial woes, funds in this ETFdb Category can be riskier than funds focusing that diversify holdings throughout the country. The largest ETF in this category is the iShares S&P California Municipal Bond Fund (CMF).
Corporate Bonds
The Corporate Bonds ETFdb Category includes funds holding bonds issued by corporate entities (generally, ETFs in this ETFdb Category limit their holdings to investment grade securities). Of the 20 ETFs placed in this category, the iBoxx $ Investment Grade Corporate Bond Fund (LQD) is by far the largest with a market capitalization of more than $12 billion. LQD covers all ends of the maturity spectrum, but there are also more targeted options available focusing on short, intermediate, and long term corporate bonds [see all of LQD's holdings here].
Emerging Markets Bonds
This ETFdb Category includes funds holding bonds issued by countries classified as emerging markets [see Why Emerging Market Bond ETFs Are Safer Than Developed Markets]. The iShares JP Morgan Emerging Markets Bond Fund (EMB) is the largest ETF is this particular category; this fund is linked to a U.S. dollar denominated emerging markets debt benchmark that tracks the total return of actively-traded debt instruments in emerging markets.
Emerging markets bonds often offer attractive returns; the majority of EMB’s assets have a strong coupon rate between 6% and 8%.
Government Bonds
The Government Bonds ETFdb Category includes funds holding primarily bonds issued by the United States government. In addition to broad-based funds, there are a number of funds offering exposure to specific maturities in this ETFdb Category. The largest ETF in this category, the Barclays 1-3 Year Treasury Bond Fund (SHY), focuses on the short end of the maturity spectrum; at the other end are ETFs such as the Barclays 20+ Year Treasury Bond Index Fund (TLT).
High Yield Bonds
The High Yield Bonds ETFdb Category includes funds that invest in bonds classified as “speculative” or “junk” by major ratings agencies. Generally “junk” bonds are defined as debt securities rated below BBB- credit quality. In order to compensate for investors for the elevated default risk, these securities often offer yields that are significantly more attractive than government bonds or investment grade corporate securities.
The largest ETF in this category is iShares’ iBoxx $ High Yield Corporate Bond Fund (HYG). HYG provides a broad representation of the U.S. dollar-denominated high yield liquid corporate bond market [see more on HYG's fact sheet]. HYG’s yield is currently around 10%, a rarity in the low interest rate environment.
Inflation-Protected Bonds
The Inflation-Protected Bonds ETFdb Category includes funds that invest in Treasury Inflation-Protected Securities (TIPS). A common misconception about TIPS is that the coupon rate changes with inflation. Actually, TIPS pays out interest twice a year a fixed rate, regardless of inflation statistics; the value of the principal is adjusted based on CPI statistics. The iShares Barclays TIPS Bond Fund (TIP) is the largest ETF in this category; TIP has a market capitalization of more than $20 billion, making it one of the largest ETFs on the market [see Three ETFs To Own If Paul Krugman Is Right].
International Government Bonds
The International Government Bonds ETFdb Category includes funds holding bonds issued by foreign federal governments and are denominated in their local currencies. The Barclays Capital International Treasury Bond Fund (BWX) tops the list of this category with a market capitalization of just over $1 billion. This ETF invests in bonds issued by international governments, in local currencies, with a maturity of one year or more and are rated investment grade. BWX has more than 100 individual holdings, with debt issued by governments of Japan, Germany, and Italy among the largest individual securities [see BWX's performance charts here].
Mortgage Backed Securities
The Mortgage Backed Securities ETFdb Category includes funds that invest in primarily investment grade mortgage-backed pass-through securities issued by various agencies of the U.S. government. The largest ETF in this category is the iShares Barclays MBS Bond Fund (MBB). MBB measures the performance of investment grade fixed-rate mortgage-backed pass-through securities of GNMA, FNMA, and FHLMC.
National Munis
The National Munis ETFdb Category includes funds holding bonds issued by various municipalities, including cities, counties, airports, school districts, and any other government entity below the state level. The category is broken up into general obligation and revenue bonds. iShares S&P National Municipal Bond Fund (MUB) is the largest ETF in our national munis category; MUB is a highly diversified fund with more than 800 individual securities [see more at Three ETFs To Protect Against Rising Taxes].
New York Munis
Similar to the aforementioned California-specific funds, ETFs in this ETFdb Category focus on municipal bonds issued within a certain state (in this case, New York). The iShares S&P NY Muni (NYF) tops a list of just 3 ETFs in this category, maintaining assets of about $75 million [see NYF's fundamentals here]. Currently, New York is also facing severe budget challenges, adding to the risk of funds in this ETFdb Category.
Preferred Stock/Convertible Bonds
The Preferred Stock/Convertible Bonds ETFdb Category includes funds holding preferred stock or convertible bonds issued by companies based in the U.S. The biggest ETF in this category is the iShares S&P U.S. Preferred Stock Fund (PFF), which measures the performance of a selected group of preferred stocks. The top holdings of this fund include Wells Fargo, Ford Motor, and JP Morgan Chase [see PFF's technicals here].
Total Bond Market
ETFs in the Total Bond Market ETFdb Category include funds that offer diversified exposure to the U.S. investment grade bond markets. The securities included in these ETFs include U.S. government bonds, investment grade corporate bonds, mortgage pass-through securities, and asset-backed securities. The largest ETF in this category is the iShares Barclays Aggregate Bond Fund (AGG), which measures the performance of the U.S. investment grade bond market.
Disclosure: No positions at time of writing.
ETF Database is not an investment advisor, and any content published by ETF Database does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned herein may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships. Read the full disclaimer here.
From ETFdb published on AUGUST 6, 2010
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Junk bonds: Savvy investment or fool's gold?
By DAVE CARPENTER (AP) – 1 day ago
CHICAGO — A sideways stock market has investors searching for other places to make a decent return on their money. And junk bonds, for better or worse, are starting to look like gems to many.
The appeal is easy to understand.
Junk bonds, known more politely as high-yield bonds, are bonds with very low credit ratings that corporations pay more interest on so they can attract investors. As of last week, they were yielding 8.34 percent, down from 9 percent earlier in July.
That number is mighty enticing at a time when the Standard & Poor's 500 index is up just 1 percent for 2010 and down 22 percent from a decade ago. And a murky economic outlook hampers prospects of a strong rebound any time soon.
Virtually nowhere else can you get 8 percent back on your money these days. The going rate for a 10-year U.S. Treasury note last week was 3.05 percent, low by historical standards. It's not much better for investment-grade, or more highly rated, corporate bonds: 3.8 percent, as measured by the Barclay's Capital U.S. Credit Bond Index.
Return-starved investors have noticed. High-yield mutual funds have seen nearly $3 billion in inflows over the past three weeks, according to Lipper FMI, a unit of Thomson Reuters.
But investor beware: They're called junk for a reason. Bonds below investment grade, or those with S&P ratings below BBB and Moody's ratings below Baa, are much likelier to default.
Not only that, junk bonds act more like stocks than other bonds do. That's because their prices are closely tied to the corporations that issue them and their ability to service debts.
So if you are considering adding them to your portfolio to diversify it, think again.
"Don't expect a junk bond to hold its value if equities are doing poorly," says John Donaldson, director of fixed income at Haverford Trust Co. in Radnor, Pa. "It will have good years when equities have good years and bad years when equities have bad years."
High-yield bonds as a group lost about 35 percent in price in 2008 during the credit crisis, when stocks also tanked.
A casual investor may want to think more about the return OF capital than the return ON capital.
That doesn't necessarily mean to steer clear of junk bonds entirely. There could be a place for them in your portfolio if you have a strong appetite for risk and a grasp of the pitfalls as well as the rewards.
"Junk bonds may provide an attractive income stream, as long as they are part of a diversified portfolio and the downside risks are clearly understood," says Joseph Jennings, director of investments for PNC Wealth Management in Baltimore.
Here's a look at some other points for investors to consider if they decide to chase those 8 percent yields:
_ Stick with funds.
The average investor should not invest in individual junk bonds. There's too big a risk of a default that can cost you a big chunk of money. A casual investor doesn't have sufficient knowledge to assess them anyway.
A good mutual fund with a broad portfolio of junk bonds can generate enough extra income to offset any defaults.
_ Investing in junk is speculating.
There's nothing wrong with speculating. But if you do that, choose only an investment that you can afford to lose money on.
"There's a reason why investors are offered such a 'bounty' relative to what they are earning on their CDs or savings accounts," says Michael Kay, a certified financial planner based in Livingston, N.J. "An investor should always ask himself or herself, if a total loss is sustained, how will that affect their portfolio, their wealth and their lives?"
Risk of total loss, of course, should be minimal if you own bonds through a fund rather than individually.
_ Experience and diversification really matter.
In researching a fund, pay extra attention to how long the portfolio manager has been there. Given the volatility of high-yield funds, you want a management team that has been tested by a variety of market conditions over the last five to 10 years and come through it with solid results.
Spreading your money out among different types of corporate junk also is extra important because of the risk that defaults in one weak sector could cost you heavily.
_ Junk bond funds vary dramatically in credit quality.
Check the credit quality before you decide on your preferred level of risk.
"High-yield portfolios can vary in quality from 'a little junky' to 'stinky,'" says Dina Lee, a personal financial specialist with the American Institute of Certified Public Accountants.
A good way to invest in junk bonds is through a low-cost exchange-traded fund such as the iShares iBoxx $ High-Yield Corporate Bond Fund (HYG).
Alternatively, five high-yield funds recommended by Chicago-based Zacks Investment Research are Transamerica Partners High Yield Bond Fund (DVHYX), Federated High-Income Bond Fund (FHIIX), USAA High-Yield Opportunities Fund (USHYX), Catalyst/SMH High Income Fund (HIIFX) and John Hancock High Yield Fund (JIHDX).
Just don't load up your portfolio with junk. Indulge with moderation, as with emerging-market stocks or with wine.
Copyright © 2010 The Associated Press. All rights reserved.
From Google News
CHICAGO — A sideways stock market has investors searching for other places to make a decent return on their money. And junk bonds, for better or worse, are starting to look like gems to many.
The appeal is easy to understand.
Junk bonds, known more politely as high-yield bonds, are bonds with very low credit ratings that corporations pay more interest on so they can attract investors. As of last week, they were yielding 8.34 percent, down from 9 percent earlier in July.
That number is mighty enticing at a time when the Standard & Poor's 500 index is up just 1 percent for 2010 and down 22 percent from a decade ago. And a murky economic outlook hampers prospects of a strong rebound any time soon.
Virtually nowhere else can you get 8 percent back on your money these days. The going rate for a 10-year U.S. Treasury note last week was 3.05 percent, low by historical standards. It's not much better for investment-grade, or more highly rated, corporate bonds: 3.8 percent, as measured by the Barclay's Capital U.S. Credit Bond Index.
Return-starved investors have noticed. High-yield mutual funds have seen nearly $3 billion in inflows over the past three weeks, according to Lipper FMI, a unit of Thomson Reuters.
But investor beware: They're called junk for a reason. Bonds below investment grade, or those with S&P ratings below BBB and Moody's ratings below Baa, are much likelier to default.
Not only that, junk bonds act more like stocks than other bonds do. That's because their prices are closely tied to the corporations that issue them and their ability to service debts.
So if you are considering adding them to your portfolio to diversify it, think again.
"Don't expect a junk bond to hold its value if equities are doing poorly," says John Donaldson, director of fixed income at Haverford Trust Co. in Radnor, Pa. "It will have good years when equities have good years and bad years when equities have bad years."
High-yield bonds as a group lost about 35 percent in price in 2008 during the credit crisis, when stocks also tanked.
A casual investor may want to think more about the return OF capital than the return ON capital.
That doesn't necessarily mean to steer clear of junk bonds entirely. There could be a place for them in your portfolio if you have a strong appetite for risk and a grasp of the pitfalls as well as the rewards.
"Junk bonds may provide an attractive income stream, as long as they are part of a diversified portfolio and the downside risks are clearly understood," says Joseph Jennings, director of investments for PNC Wealth Management in Baltimore.
Here's a look at some other points for investors to consider if they decide to chase those 8 percent yields:
_ Stick with funds.
The average investor should not invest in individual junk bonds. There's too big a risk of a default that can cost you a big chunk of money. A casual investor doesn't have sufficient knowledge to assess them anyway.
A good mutual fund with a broad portfolio of junk bonds can generate enough extra income to offset any defaults.
_ Investing in junk is speculating.
There's nothing wrong with speculating. But if you do that, choose only an investment that you can afford to lose money on.
"There's a reason why investors are offered such a 'bounty' relative to what they are earning on their CDs or savings accounts," says Michael Kay, a certified financial planner based in Livingston, N.J. "An investor should always ask himself or herself, if a total loss is sustained, how will that affect their portfolio, their wealth and their lives?"
Risk of total loss, of course, should be minimal if you own bonds through a fund rather than individually.
_ Experience and diversification really matter.
In researching a fund, pay extra attention to how long the portfolio manager has been there. Given the volatility of high-yield funds, you want a management team that has been tested by a variety of market conditions over the last five to 10 years and come through it with solid results.
Spreading your money out among different types of corporate junk also is extra important because of the risk that defaults in one weak sector could cost you heavily.
_ Junk bond funds vary dramatically in credit quality.
Check the credit quality before you decide on your preferred level of risk.
"High-yield portfolios can vary in quality from 'a little junky' to 'stinky,'" says Dina Lee, a personal financial specialist with the American Institute of Certified Public Accountants.
A good way to invest in junk bonds is through a low-cost exchange-traded fund such as the iShares iBoxx $ High-Yield Corporate Bond Fund (HYG).
Alternatively, five high-yield funds recommended by Chicago-based Zacks Investment Research are Transamerica Partners High Yield Bond Fund (DVHYX), Federated High-Income Bond Fund (FHIIX), USAA High-Yield Opportunities Fund (USHYX), Catalyst/SMH High Income Fund (HIIFX) and John Hancock High Yield Fund (JIHDX).
Just don't load up your portfolio with junk. Indulge with moderation, as with emerging-market stocks or with wine.
Copyright © 2010 The Associated Press. All rights reserved.
From Google News
Are Bonds Expensive? Stocks Cheap? Both?
JULY 31, 2010
By MARK GONGLOFF
Bonds continue to trounce stocks, sending mixed signals to investors and raising the question: Are stocks too cheap or are bonds too expensive?
After consistently lagging behind bond performance this year, stocks appear historically cheap compared with bonds, offering investors reason to favor stocks, particularly if they are optimistic about the economic outlook. But stocks may be cheap because the outlook is dim, meaning bonds—from Treasurys to corporate debt—could continue to outperform for the foreseeable future.
So far this year, the stock market's total return is slightly negative, while normally staid investment-grade corporate bond returns are up nearly 8%, according to Bank of America Merrill Lynch indexes. Even risk-free Treasury returns are up 6%.
Stocks made up some ground with a 7.1% rally in the Dow Jones Industrial Average in July. But such stock rallies have stalled repeatedly in recent months as weak economic data have outweighed signs of hope from corporate earnings. The yield on the 10-year Treasury note has dropped below 3% as investors scramble for safe havens, and the demand for corporate bonds is booming.
One way to compare the relative value of stocks and bonds is to compare their yields, or the amount of cash each asset generates on a regular basis.
Bond yields are easy to see; stock yields are trickier. Many analysts like to use something called an "earnings yield," which is the inverse of a company's price/earnings ratio. While imperfect, earnings yield measures how much cash a company generates for itself and its shareholders as a percentage of its price. As with bonds, higher yields represent lower prices, and vice-versa.
At the end of trading Friday, the earnings yield on the Standard & Poor's 500 index was 6.6%, based on the past four quarters' operating earnings, the highest since 1995.
The gap between that yield and the 10-year Treasury yield—a measure of the cheapness of stocks relative to Treasury bonds—is the widest about 30 years, according to Jason DeSena Trennert, chief investment strategist at Strategas Research Partners.
To Mr. Trennert, this suggests that stocks are too cheap, bonds are too expensive after a strong rally this year, or both.
"People are so risk-averse now that a tremendous potential opportunity is being created in stocks," he said.
He warned, however, that it could take time for that opportunity to be realized, given the high levels of uncertainty about the economic outlook. "The reasons we're seeing this are secular in nature," he said. "They reflect very long-term problems that are not easily fixed."
It isn't exactly surprising for bonds to outperform stocks during a period when stocks are falling. Except for periods of high inflation, corporate bonds, particularly investment-grade, often hold up better in an environment where stocks are falling.
But even last year, when stocks enjoyed one of their most stirring rallies in history, there were at least two long episodes during the bull run when corporate bonds outperformed, according to an analysis by Jason Quinn, co-head of high-grade and high-yield flow trading at Barclays Capital, comparing stock prices to bond yields. In contrast, in the bull market that followed the 2001 recession, stocks outperformed bonds consistently.
In the eyes of stock-market bulls, the underperformance this time around has left corporate bonds expensive and stocks attractively cheap, pricing in dire economic outcomes that most forecasters still don't think likely.
"You would have to believe in at least a mild recession to prefer corporate bonds over equities at this stage," said David Bianco, chief U.S. equity strategist for Bank of America Merrill Lynch.
Mr. Bianco prefers to compare the stock market's earnings yield to the yield on 10-year Treasury Inflation-Protected Securities, as TIPS yields include inflation protection while stock prices and dividend yields do not.
Today, that gap is about six percentage points, compared with about three historically, according to Mr. Bianco—suggesting stocks are underpriced relative to bonds, particularly given how low inflation is.
"I would argue that the asset class with the most upside, even in a scenario of slow growth, is equities," said Mr. Bianco, who has a 12-month target of 1350 for the S&P 500.
The recent outperformance of bonds is also partly a reflection of the fact that individual investors have largely turned their back on stocks after two crushing bear markets and a decade of negative returns.
Despite last year's stock-market rally, one of the best on record, individual investors pulled money from stock mutual funds and poured them into bond funds. The trend has continued this year, with long-term stock funds suffering a net $1.1 billion in outflows and bond funds enjoying $177.6 billion in inflows, according to the Investment Company Institute.
"Investors over the decade of the 2000s were protected by the bond market and beaten up by the stock market," said David Kelly, chief market strategist for J.P. Morgan Funds. "That memory is so powerful in their minds that they'd rather overpay for a bond than underpay for a stock."
Skeptics note that bonds have outperformed stocks partly because economic growth has been too sluggish to help stocks go very far, but not so slow that it pushes companies, many of which are loaded with cash, into default. If such conditions persist as many observers believe, then the stock market could continue to lag behind.
"We could end up with slower growth than people think, and that's not going to be great for the equity market, but it doesn't really matter for credit," said Mr. Quinn of Barclays Capital.
Many skeptics warn that a key difference between this recovery and others where stocks consistently outpaced bonds is the withering of private borrowing and the financial sector, big drivers of recovery in economic and corporate-profit growth in prior expansions.
Private-sector borrowing has shrunk in this recession for the first time since the Great Depression, notes Northern Trust chief economist Paul Kasriel, who in July cut his forecast for annualized economic growth in the second half of 2009 to 1.8% from 2.5%.
He noted that private borrowing continues to contract despite near-zero interest rates from the Federal Reserve. Stimulus is set to fade and unemployment remains high. Under such conditions, borrowing will remain low, and the scarcity of new debt will prop up its value.
"The risk premium in the bond market will increase, but I'm not going to put that bet on now," Northern Trust chief investment officer Bob Browne said in an interview.
from the wall street journal published on JULY 31, 2010
By MARK GONGLOFF
Bonds continue to trounce stocks, sending mixed signals to investors and raising the question: Are stocks too cheap or are bonds too expensive?
After consistently lagging behind bond performance this year, stocks appear historically cheap compared with bonds, offering investors reason to favor stocks, particularly if they are optimistic about the economic outlook. But stocks may be cheap because the outlook is dim, meaning bonds—from Treasurys to corporate debt—could continue to outperform for the foreseeable future.
So far this year, the stock market's total return is slightly negative, while normally staid investment-grade corporate bond returns are up nearly 8%, according to Bank of America Merrill Lynch indexes. Even risk-free Treasury returns are up 6%.
Stocks made up some ground with a 7.1% rally in the Dow Jones Industrial Average in July. But such stock rallies have stalled repeatedly in recent months as weak economic data have outweighed signs of hope from corporate earnings. The yield on the 10-year Treasury note has dropped below 3% as investors scramble for safe havens, and the demand for corporate bonds is booming.
One way to compare the relative value of stocks and bonds is to compare their yields, or the amount of cash each asset generates on a regular basis.
Bond yields are easy to see; stock yields are trickier. Many analysts like to use something called an "earnings yield," which is the inverse of a company's price/earnings ratio. While imperfect, earnings yield measures how much cash a company generates for itself and its shareholders as a percentage of its price. As with bonds, higher yields represent lower prices, and vice-versa.
At the end of trading Friday, the earnings yield on the Standard & Poor's 500 index was 6.6%, based on the past four quarters' operating earnings, the highest since 1995.
The gap between that yield and the 10-year Treasury yield—a measure of the cheapness of stocks relative to Treasury bonds—is the widest about 30 years, according to Jason DeSena Trennert, chief investment strategist at Strategas Research Partners.
To Mr. Trennert, this suggests that stocks are too cheap, bonds are too expensive after a strong rally this year, or both.
"People are so risk-averse now that a tremendous potential opportunity is being created in stocks," he said.
He warned, however, that it could take time for that opportunity to be realized, given the high levels of uncertainty about the economic outlook. "The reasons we're seeing this are secular in nature," he said. "They reflect very long-term problems that are not easily fixed."
It isn't exactly surprising for bonds to outperform stocks during a period when stocks are falling. Except for periods of high inflation, corporate bonds, particularly investment-grade, often hold up better in an environment where stocks are falling.
But even last year, when stocks enjoyed one of their most stirring rallies in history, there were at least two long episodes during the bull run when corporate bonds outperformed, according to an analysis by Jason Quinn, co-head of high-grade and high-yield flow trading at Barclays Capital, comparing stock prices to bond yields. In contrast, in the bull market that followed the 2001 recession, stocks outperformed bonds consistently.
In the eyes of stock-market bulls, the underperformance this time around has left corporate bonds expensive and stocks attractively cheap, pricing in dire economic outcomes that most forecasters still don't think likely.
"You would have to believe in at least a mild recession to prefer corporate bonds over equities at this stage," said David Bianco, chief U.S. equity strategist for Bank of America Merrill Lynch.
Mr. Bianco prefers to compare the stock market's earnings yield to the yield on 10-year Treasury Inflation-Protected Securities, as TIPS yields include inflation protection while stock prices and dividend yields do not.
Today, that gap is about six percentage points, compared with about three historically, according to Mr. Bianco—suggesting stocks are underpriced relative to bonds, particularly given how low inflation is.
"I would argue that the asset class with the most upside, even in a scenario of slow growth, is equities," said Mr. Bianco, who has a 12-month target of 1350 for the S&P 500.
The recent outperformance of bonds is also partly a reflection of the fact that individual investors have largely turned their back on stocks after two crushing bear markets and a decade of negative returns.
Despite last year's stock-market rally, one of the best on record, individual investors pulled money from stock mutual funds and poured them into bond funds. The trend has continued this year, with long-term stock funds suffering a net $1.1 billion in outflows and bond funds enjoying $177.6 billion in inflows, according to the Investment Company Institute.
"Investors over the decade of the 2000s were protected by the bond market and beaten up by the stock market," said David Kelly, chief market strategist for J.P. Morgan Funds. "That memory is so powerful in their minds that they'd rather overpay for a bond than underpay for a stock."
Skeptics note that bonds have outperformed stocks partly because economic growth has been too sluggish to help stocks go very far, but not so slow that it pushes companies, many of which are loaded with cash, into default. If such conditions persist as many observers believe, then the stock market could continue to lag behind.
"We could end up with slower growth than people think, and that's not going to be great for the equity market, but it doesn't really matter for credit," said Mr. Quinn of Barclays Capital.
Many skeptics warn that a key difference between this recovery and others where stocks consistently outpaced bonds is the withering of private borrowing and the financial sector, big drivers of recovery in economic and corporate-profit growth in prior expansions.
Private-sector borrowing has shrunk in this recession for the first time since the Great Depression, notes Northern Trust chief economist Paul Kasriel, who in July cut his forecast for annualized economic growth in the second half of 2009 to 1.8% from 2.5%.
He noted that private borrowing continues to contract despite near-zero interest rates from the Federal Reserve. Stimulus is set to fade and unemployment remains high. Under such conditions, borrowing will remain low, and the scarcity of new debt will prop up its value.
"The risk premium in the bond market will increase, but I'm not going to put that bet on now," Northern Trust chief investment officer Bob Browne said in an interview.
from the wall street journal published on JULY 31, 2010
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