…comes from Ed Yardeni and his excellent blog:
Over the past 36 months through February, net inflows into bond mutual funds totaled $1.0 trillion, while net inflows into equity funds were close to zero. Unfortunately for bond investors, the equity funds enjoyed capital gains of $2.7 trillion over this period, while the bond funds had gains of only $437 billion. Now that bond yields are starting to move higher, those gains are likely to decline. That might convince individual investors to move back into equities.
His chart of bond flows is actually pretty amazing. Net flows to stock funds, in contrast, have been pretty flat for the last five years.
Source: Dr. Ed’s Blog/ICI (click on image to enlarge)
There’s no doubt that good equity returns provide some competition for risk-off assets like bonds. However, stock returns have been pretty good for several years and it hasn’t resulted in significant behavior change on the part of bond buyers. In my opinion, that’s because bond investors are still making money on an absolute basis. Sure, they aren’t making what the stock market is making—but they are not losing money. If and when bond owners start to actually lose money on a nominal basis, we might see a change in the dynamic. (Many are already underwater in terms of real returns.) That change could provide fuel for the stock market, but maybe only if stocks are doing well at the time.
Although seems logical that money would flow immediately when relative performance changes, there is obviously a big emotional component to investor behavior too. Emotions and good investing don’t go well together.
