US bond funds rake in more cash despite inflation fears

Link: https://www.ft.com/content/787d1be6-e7d9-43a2-b77c-07916fe19f3e

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Analysts attributed the popularity of bond funds — which do not include money-market holdings — to concerns about lofty stock valuations and an ageing population’s need for steady income during retirement.

“Financial advisers follow asset allocation models and portfolio rebalancing and demographics are strong trends,” said Shelly Antoniewicz, ICI senior director of financial and industry research. “The cumulative flow to bond funds lines up nicely with the percentage of the population over 65 years.”

Author(s): Michael Mackenzie

Publication Date: 6 July 2021

Publication Site: Financial Times

Not Even Bond Traders Can Predict the Future

Link: https://www.bloomberg.com/opinion/articles/2021-06-18/bond-traders-can-t-predict-inflation-any-better-than-anyone-else

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Historically, bond yields have not been very good at predicting inflation.

In the last 70 years, bond yields rarely rose ahead of inflation, going up only after inflation takes hold.  One study indicated that past inflation trends were a better predictor of bond rates than what future inflation turned out to be.

Does this mean bond traders are wrong? Not necessarily. It may just reflect that inflation is unpredictable and bond traders don’t know any more about the future than the rest of us. All they have is the past data and current prices to make their predictions, too. So when inflation suddenly spikes — as it has in the past — bond traders are as surprised as everyone else.

Author(s): Allison Schrager

Publication Date: 18 June 2021

Publication Site: Bloomberg

Bond Selloff Prompts Stock Investors to Confront Rising Rates

Link: https://www.wsj.com/articles/bond-selloff-prompts-rethink-bystock-investors-11613919600

Excerpt:

The sharp increase this month in U.S. government-bond yields is pressuring the stock market and forcing investors to more seriously confront the implications of rising interest rates.

The lift in yields largely reflects investor expectations of a strong economic recovery. However, the collateral damage could include higher borrowing costs for businesses, more options for investors who had seen few alternatives to stocks and less favorable valuation models for some hot technology shares, investors and analysts said.

As of Friday [Feb 19], the yield on the benchmark 10-year U.S. Treasury note stood at 1.344%, up from 1.157% just five trading sessions earlier and roughly 0.9% at the start of the year.

Author(s): Sam Goldfarb

Publication Date: 21 February 2021

Publication Site: Wall Street Journal

Monetary policy and the corporate bond market: How important is the Fed information effect?

Link: https://www.federalreserve.gov/econres/feds/monetary-policy-and-the-corporate-bond-market-how-important-is-the-fed-information-effect.htm

Abstract:

Does expansionary monetary policy drive up prices of risky assets? Or, do investors interpret monetary policy easing as a signal that economic fundamentals are weaker than they previously believed, prompting riskier asset prices to fall? We test these competing hypotheses within the U.S. corporate bond market and find evidence strongly in favor of the second explanation—known as the “Fed information effect”. Following an unanticipated monetary policy tightening (easing), returns on corporate bonds with higher credit risk outperform (underperform). We conclude that monetary policy surprises are predominantly interpreted by market participants as signaling information about the state of the economy.

DOI: https://doi.org/10.17016/FEDS.2021.010

PDF: Full Paper

Author(s): Michael Smolyansky and Gustavo Suarez

Publication Date: 16 February 2021

Publication Site: Federal Reserve Board