In our recent article, The real bull market is in bonds, we highlight that over the past year that there has been a huge discrepancy between stock and bond mutual fund flow, with a clear preference for fixed income by investors. While there has been talk of a “bond bubble” recently, which is market pundits calling for a correction in the bond market, we note that fund flows into fixed income have actually been accelerating to start 2013 not decelerating.
Weekly Total Bond flow as reported by the Investment Company Institute (ICI) hit $8.0 billion last week, culminating the strongest 3 week run over the past year. For the two weeks prior, fund flow hit $10.6 billion for the second week of 2013 and for the first week of the New Year, new money into bond mutual funds hit $9.4 billion. This $28 billion which came into bond funds over the past three-weeks was the highest amount in any three-week period by over $1 billion over the past 12 months.
The individual weeks of $10.6 billion and $9.4 billion most recently are significant because the $10.6 billion week was the second highest weekly inflow over the past year with the $9.4 billion inflow, the 6th best of the past 12 months which indicates that investor appetite is far from slowing down. While we continue to believe that fund flow is a lagging indicator to market performance 1, as highlighted above the 10 year Treasury yield index 2 continues to kick off gains for fixed income holders.
While all good things come to an end, bond market performance and fund flow is still steady. This environment benefits the leading bond fund managers including Legg Mason (LM), Franklin Resources (BEN), and Blackrock (BLK). When the bond market however starts to unravel, these trends will be to the detriment of these managers.