- Recent patterns for mutual fund inflows reinforce our prior beliefs on how households are signaling their investment preferences, looking for yield without too much risk, and keeping just-in-case cash on hand.
Investors Prefer Bonds—Especially Investment Grade
Households are demonstrating a clear preference for the balance of yield and safety as represented in investment grade bonds (top graph). With a positive yield curve and returns above that of Treasury debt, household net cash flow into investment grade bonds has risen dramatically since 2009 when the economic recovery began.
The latest 12-week moving average is at $2.2 billion and represents nearly a record high for this economic expansion. High grade companies include a wide range of economic sectors including chemicals, financial institutions, industrial and energy & power sectors. Year-to-date, the total return on investment grade bonds has been above 5 percent so households investing here have made a very good decision. Even as we expect the Fed to begin raising short-term interest rates in the middle of next year, we do not expect to see a large jump in Treasury yields, as we expect the yield on the 10-year Treasury to remain below 3 percent by the end of 2015, and below 4 percent by the end of 2016. With this in mind, it seems that net inflows into investment grade bond funds is positioned to continue
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