Saturday, June 15, 2013

Rotation out of fixed income

Last year we discussed just how frothy the US fixed income valuations have become (here and here). Now in a matter of several weeks, the US bond markets have wiped out a year's worth of gains and then some. That includes all the interest income.

In fact, according to JPMorgan, May saw the worst global bond performance since early 2004.

Source: JPMorgan

All of a sudden the realization has set in that rates may in fact rise and the multi-year bond rally may at some point come to an end. Google Trends shows a spike in searches related to rates rising.

Google search frequency for rates rising

Not surprisingly bond fund and ETF outflows spiked, as investors began abandoning the beloved fixed income funds in droves.

Source: ISI Group

In the next post we will discuss the so-called "Great Rotation", which predicts that these outflows should end up in the equity markets.
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