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What happens when Americans develop a taste for the bond markets?
Bond prices have soared, yields have plummeted, and pundits raise the specter of looming inflation, yet none of it has stopped Americans from shifting their savings into fixed-income funds. Retail investors dropped another $7.5 billion into bond mutual funds last week, according to the Investment Company Institute, and pulled $5.25 billion from domestic stock funds.
It's shaping up to be a golden age for fixed-income, says David Rosenberg, chief strategist at Gluskin Sheff, in a note to clients this week. ICI data show bond funds have netted $320 billion this year, thanks to a flow of new cash every month. U.S. equity funds, by contrast, have lost $226 million in cash since the stock market began its March rally.
That shift in sentiment, and the money that comes with it, have had the effect of driving down interest rates on debt and enticing companies to sell new bonds. General Electric ( GE - news - people ), Revlon ( REV - news - people ) and broadcaster Belo ( BLC - news - people ) were among the corporations tapping the bond markets this week. Cisco Systems ( CSCO - news - people ) raised $4.9 billion in a sale managed by Barclays ( BCS - news - people ), Credit Suisse ( CS - news - people ) and Deutsche Bank ( DB - news - people ).
The average investment-grade corporate bond yields 4.8%, down from 8.3% on March 12, according to BofA Merrill Lynch indexes. One from a low-rated company pays an average 9.8% compared with 20.2% in March.
In the market for U.S. government debt, the Treasury pulled off another record round of auctions, selling $81 billion in two-year notes, 10-year notes and 30-year bonds. The flood of supply left yields little changed, upsetting predictions that investors would demand higher rates to buy U.S. paper.
Rates are bound to rise eventually, say bond market strategists, but a sluggish economy and a lack of inflation (especially without growth in wages) will prevent the Federal Reserve from raising its overnight lending rate, the anchor for short-term Treasury yields.
Credit markets are awash in cash, says Dan Greenhaus, chief economic strategist at Miller Tabak. "And if you're nervous about the economy, if you think the Fed is going to be on hold for longer, then 3.5% on a 10-year Treasury is a steal."
The often-wry Rosenberg suggests a benefit to the growing appetite for fixed-income investments. After crunching the data, he estimates the share of household assets in credit markets has climbed over 6%. If Americans return to their habits of the 1950s, when the share topped 8%, they'd have to deposit another $1.3 trillion in fixed-income funds. "At least that's enough to cover a year's worth of U.S. government deficits!"
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