Despite Stock Rally, Most Investors Still Flock to Bonds
Published: Tuesday, 28 Feb 2012 | 12:41 PM ET
Despite a bull-market surge over the past four months, retail investors continue to shun stocks, missing out on one of the biggest rallies in years.
Bond funds over the past four weeks have taken in a staggering seven times as much money as equity funds, continuing a pattern that has held steady since the cycle run began, according to TrimTabs data.
Yet stocks have produced four times the return as their fixed-income counterparts in 2012, even as mom-and-pop investors have stayed on the sidelines and continued to look for safe-haven bets while shunning risk.
"Retail investors still think about 2008. People are not convinced we're in a stock market rally," Nadav Baum, executive vice president at BPU Investment Management in Pittsburgh, Pa., says in reference to the darkest days of the financial crisis.
Like many in his profession, Baum worries that most investors won't get back into the market until the indexes climb to an even higher peak — perhaps the Dow industrials at a record 14,500, he suggests.
"2008 is still very fresh," Baum says. "There's still a lot of geopolitical issues. They're still not convinced that the Greece and Italy things are done yet. None of these things have changed from last year. That's why you're still getting all these flows into the fixed-income side. That's the safe haven, not the equity side."
Bond mutual funds have attracted $30.4 billion over the past month even as they have returned just 2.8 percent this year.
While both investment grade and high-yield bonds both have posted record issuance in recent weeks, low-yielding Treasurys remain the preference, drawing in about double the assets of corporates over the past three months, according to TrimTabs. Corporates, however, have drawn about even with Treasurys over the past month.
For Kevin Ferry, president of Cronus Futures Management, a bond-trading firm in Chicago, the fund flows are sending an even more ominous message: That the rush to government securities is leading to "the secular end of a 30-year bull market in bonds."
"It scares the hell out of me," he says. "The baby boomers are the biggest lemmings around. They're buying into the concept of financial repression."
As a trader, Ferry says he's been buying futures contracts on the 10-year Treasurys solely for short-term trading positions. Anyone who's looking at the government bonds as a long-term money store, he says, instead should be focusing on what bigger buyers are doing.
"What is the smart money doing? What are the long-term holders of Treasury securities over the last 20 years — Japan, China, Russia — doing? They're diversifying away from them," Ferry says. "They're valueless pieces of paper. They're capital appreciation notes. Everyone who buys them predicates it on a predetermined scenario: That I'll get out before it goes wrong."
(China, the largest foreign holder of U.S. debt, has cut its Treasurys portfolio by 5 percent over the past year. Russia has slashed its total by 72 percent, though Japan actually has increased its U.S. purchases, according to Treasury data.)
The worry with Treasurys is two fold: The Federal Reserve is keeping rates artificially low and likely will for at least the next two years, while the specter of inflation ahead will outweigh the value of fixed-income investments.
Yet stock market investors also face the same worry over what happens once the Fed starts pulling its bond-buying stimulus programs, which simultaneously have kept rates low while pushing investors towards stocks and commodities.
TrimTabs CEO Charles Biderman says fear of what happens after quantitative easing and other interventions run their course is what could be keeping retail investors from hopping aboard the stock market train.
Curiously, investor surveys, such as the one run by the American Association of Individual Investors, have reflected strongly bullish sentiment for going on nine straight weeks. But investors haven't been backing that up with their dollars.
In addition to parking their money in bonds, individuals have plowed $2.3 trillion into savings accounts over the past five years, which is 2.4 times the amount allocated to bonds.
"The bulls dancing to the central bank’s music had better stay close to the door so they can exit quickly when their medicine becomes poison and the music stops," Biderman said in his weekly analysis. "While central bankers can print all the money they want, they cannot control where the money goes."
© 2012 CNBC.com