Investors rushing to safety amid escalating trade conflicts and signs of a slowing global economy have been pouring cash into bond ETFs and other bond funds at a staggering pace. Bank of America Merrill Lynch Global Research indicates that global bond funds are on pace to hit record inflows of $455 billion in 2019. That’s about 27% of the $1.7 trillion of bond-fund inflows recorded over the past 10 years, according to Barron’s

Some of the major funds posting inflows include the iShares Core U.A. Aggregate Bond ETF (AGG), the Vanguard Total International Bond ETF (BNDX), the iShares Short Treasury Bond ETF (SHV), the Vanguard Intermediate-Term Bond ETF (BIV), and the iShares U.S. Treasury Bond ETF (GOVT).

What It Means for Investors

For the week that ended July 17, mutual funds and ETFs tracking bonds received $12.1 billion worth of investors’ cash, making it the 28th consecutive of week of inflows and bringing the total amount of inflows to $254 billion since the start of the year. Meanwhile, equity funds are experiencing net outflows with as much as $45.5 billion flowing out of mutual funds and ETFs tracking U.S. equities so far this year, according to the The Wall Street Journal.

The cycling of funds out of equities and into bonds suggests investors are becoming increasingly pessimistic about the current macroeconomic environment, including the escalating U.S.-China trade war. The trade tensions are exacerbating an economic slowdown in China and likely holding back U.S. growth as well. 

“Investors still don’t see much upside for economic growth, corporate profits or inflation,” said Jared Woodard, global investment strategist at BoA Merrill Lynch. “We’re seeing investors allocating to some of the least risky, most conservative parts of the fixed-income market.” 

Despite the Federal Reserve's interest rate cut last week, Fed Chairman Jerome Powell’s labelling the move as a “mid-cycle adjustment” was taken by markets as a sign that future rate cuts were unlikely. Stocks slid, the dollar rallied and the Treasury yield curve continued to invert, all typical signs of less-accommodative monetary conditions.

The U.S. yield curve, specifically the spread between the three-month and 10-year Treasury yields, has been inverted for a number of months now and inverted to its widest level since 2007 on Monday. The three-month/10-year spread has inverted prior to every U.S. recession over the past 50 years.

Cash flowing into bond funds while yields tumble is a sign that investors are more concerned about protecting their assets than they are about earning income as fears of recession mount. The 10-year U.S. Treasury note was down to 1.71% on Monday compared to 3.2% back in November. 

“Even with low yields, bonds play a really important role in providing a cushion against shocks in other parts of the market,” said Mike Pyle, global chief investment strategist at the BlackRock Investment Institute, according to Barron’s. “The ability of a portfolio to withstand a variety of adverse conditions is crucial, particularly in a time of elevated macro uncertainty.”

But the low yields are causing others to see the bond market as a potential source of risk rather than a safe haven. The $14.3 billion Thornburg Investment Income Builder fund held under 10% of its portfolio in the form of bonds as of the end of June. Thornburg’s chief executive Jason Brady said that with bond yields so low, “an income investor looking farther afield needs to be careful with credit.” 

Looking Ahead

While U.S. economic growth is still positive and some recent data on employment, consumer spending and industrial production have indicated the economy still has some strength in it, investors will continue to keep a vigilant eye on any indication of further weakness.