Todd Sohn
Technical Strategist

Investors Are Bailing On Bonds

A staple in many investor portfolios, bonds are in the midst of their worst drawdown in over 40 years. The Bloomberg Aggregate Bond Index is down over 11% from the highs, and combined with the ongoing weakness from equities (the S&P 500 is also down over 11% YTD), it’s a sharp contrast to the last decade of balanced returns between asset classes.  Reasons for price declines are always difficult to strictly define, but we’re inclined to believe the diverse macro environment – hot inflation, a tighter fed, and constant geopolitical tensions – are playing an important role in the performance of major asset classes.   

 

To further display the weakness from bonds, the below chart shows YTD performance for the entire spectrum of fixed income ETFs (over 500 products). Simply put, practically every fixed income fund has produced negative performance… although over 60% are currently beating the Aggregate benchmark (e.g. TIPS, MBS categories).

Source: Bloomberg

Looking to flows, the weak performance from bonds is best exhibited by the below chart. 12 of the last 13 trading weeks have seen outflows from fixed income mutual funds totaling roughly $140 Bn in departed investor assets. It’s a rare occurrence, and last seen during the 2018 Fed hiking cycle as well as the Covid crash of 2020. Thinking about this from a sentiment perspective, with bonds across the curve deeply oversold, along with major outflows, we’re curious if these inputs may offer a reprieve for the beaten down asset class over the summer months.

Source: Bloomberg

So, with both bonds and equities struggling 2022, what are investors to do? Looking to YTD ETF flows and performance, commodities have picked up the slack with over $20 Bn inflows and sharp outperformance (a basket of commodities is up 32% YTD). Fixed Income ETFs tend to see inflows no matter the environment (although like mutual funds, those consistent flows have slowed), but the shrinking gap between bonds and commodities suggests that investors are now looking beyond the typical “60/40” portfolio and welcoming new alternatives in search of balancing returns.

Source: Bloomberg

 

Published on May 2nd, 2022. The information is current only as of the date of this communication and we do not undertake to update or revise such information following such date. This communication is provided for informational purposes only and is not an offer, recommendation, or solicitation to buy or sell any security.  This is not a complete analysis of every material fact regarding any company, industry, or security. Additional analysis would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any particular client and is not presented as suitable to any other particular client. Past performance does not guarantee future results. All investments carry some level of risk, including loss of principal.