Bond Funds: Exactly As I Expected

 In my view this (below)was totally predictable: investors piled into bonds with the rationale that they were seeking a "safe investment" while in fact they were simply chasing the outperforming asset class. And with low yields at the short end of the yield curve they piled into longer term bonds...which are the riskiest once rates start to rise. Meanwhile corporations rebuilt their balance sheet by selling billions of $ in low interest rate long term debt.


WSJ reports:

Bond Funds Take It on the Chin 

By JANE J. KIM

Bonds are supposed to be safe,(in my view anyone that understands bonds knows that long duration bonds are in fact quite risky remember a 20 year duration bond falls 20% in value with a 1% increase in rates)

but the world's five largest bond mutual funds have all posted losses in the past two months—with three of them losing more in December than in November.

And now surprise here the retail investors are bailing from the bond funds.

As the losses mount, investors are pulling back. They yanked $5 billion out of bond funds during the week ended Dec. 15, pushing the five-week total outflow to a record $7.6 billion, according to EPFR Global, a Boston fund-flow tracker.
A selloff in U.S. Treasurys is spreading to most bond sectors, including corporate and municipal bonds. The yield on the benchmark 10-year Treasury, which moves in the opposite direction of price, has jumped about a full percentage point in the past month on fears that aggressive monetary and fiscal stimuli could trigger inflation and higher interest rates down the road.
"This is the first time you've seen a broad selloff across bond sectors since October 2008," says Miriam Sjoblom, an analyst at investment-research firm Morningstar Inc. Back then, at the worst of the financial crisis, the Barclays U.S. Treasury Index lost a fraction of a percent, while other credit sectors got slammed.

While the five biggest bond funds are still up for the year, they have performed poorly of late. The $250 billion Pimco Total Return Fund, the world's largest bond fund, lost 3.42% from Nov. 4 through Dec. 17, compared with a 2.51% loss in the BarCap U.S. Aggregate Bond Index over the same period, according to Morningstar. The second- and fourth-largest bond funds, the $89 billion Vanguard Total Bond Market Index Fund and the $38.4 billion American Funds Bond Fund of America Fund, respectively, have lost 2.64% and 2.79%.

and investors learned the meaning of duration and the relative risk of short vs long term bonds:
The losses were smaller in the $38.3 billion Vanguard Short-Term Investment Grade Fund, which lost 0.91% over the period in part because of the fund's shorter-duration securities, ...
Three of the five largest funds have lost more so far in December than they did in November. Through Dec. 17, Pimco Total Return, Vanguard Total Market Bond Index and American Funds Bond Fund of America were down 1.31%, 1.60% and 1.34%, respectively, while the Vanguard Short-Term Investment Grade Fund was down 0.40%, according to Morningstar.

The interesting question is how the flood of retail performance chasing investors has changed the behavior of a market usually dominated by insurance companies, pensions and endowments. It is quite possible that much like the commodity markets which have more retail investors due to the growth of etfs, we will see a more extreme move in bonds caused by the retail outflow. At some point this will provide an opportunity for savvy buyers of bonds just as the low rates caused by the retail buyers created an opportunity for corporations to float cheap debt..