Rising fears of an economic recession are spurring many investors to flee stocks for corporate bonds. Net inflows for mutual funds and ETFs that invest in high grade U.S. corporate bonds (also called investment grade bonds) have been averaging $846 million per day in March, up from the previous record of $800 million per day in January 2018, per research by Bank of America Merrill Lynch reported by CNBC.
If those trends continue, nearly $25 billion will flow into corporate bonds this month. "Based on daily fund and ETF inflows, March is on track to set a new monthly record," according to a note from Yuri Seliger and Yunyi Zhang, credit strategists at BofAML, per CNBC. "Flows follow returns and the drop in interest rates since Monday of last week should encourage potentially even stronger inflows in April," they added. The table below summarizes some of the recent action.
Investors Pivot To High Grade U.S. Corporate Bonds
- Record average daily net inflows to high grade corporates so far in March
- Includes net inflows to mutual funds and ETFs
- Average daily inflow in March nearly 6% above previous record
- SPDR S&P 500 ETF (SPY) has net outflow of $10 billion year-to-date
Significance For Investors
Recessionary worries are increasing, spurred by the emergence of an inverted yield curve, which historically has been a leading indicator of an economic contraction. Recession expectations could help trigger bear markets in stocks, and growing numbers of investors are rotating from equities into fixed income instruments.
Such pessimism is occurring even as the S&P 500 Index (SPX) has posted a robust 12.1% year to date through the open of trading on Thursday. The widely-followed market barometer also has rebounded by 19.7% from its Dec. 2018 low.
Concerns about sputtering economic growth have sent bond yields downward and bond prices upward across the globe since late last year, the Financial Times reports. While historically low interest rates have been a major factor driving the current bull market in stocks, right now "falling bond yields are not necessarily good news either, given the message it sends about the global outlook for economic growth," the FT observes, regarding the impact on stocks.
Nonetheless, for investors eager to lock in their gains on equities and play it safe, investment grade corporate bonds offer additional yield over U.S. Treasury debt. Corporate bonds rated Baa by Moody's, near the low end of investment grade, currently yield about 230 basis points (bps) more than 10-Year U.S. Treasury Notes, per the Federal Reserve Bank of St. Louis.
Meanwhile, high yield corporate debt, or junk bonds, outperformed investment grade corporates during the first two months of 2019, leading Martin Fridson, the chief investment officer (CIO) at Lehmann, Livian, Fridson Advisors, to warn that they are overpriced, per Barron's. He prefers high quality corporates. Additionally, liquidity has been plunging in the high yield market, and a potential flood of downgrades into junk status may swamp it, sending yields soaring and prices tumbling, per an earlier CNBC report.
Jim Paulsen, chief investment strategist (CIO) at The Leuthold Group, is among those who are optimistic about stocks, seeing a buy signal for equities in the downward movement of bond yields. Others, such as Stephanie Pomboy of economic consulting firm MacroMavens, see a dangerous corporate debt bubble that threatens stock and bond markets alike. These mixed signals by themselves are a clear warning sign of how treacherous the markets may become.