Capital Flows: Out of Bonds, Into…?

The enormous flow of capital into corporate bond funds over the the past year seems to be coming to an end with investors starting to worry about rising interest rates.  The major bond fund ETFs $LQD and $JNK are testing their 200 day moving averages.  The junk bond ETF as you know trades very similar to the equity indices.  by looking at the spread between corporates and junk bonds, we can determine on an intermediate term time frame whether the market as a whole is favoring more or less risk.  We have obviously gone through a period over the last few wees of derisking as seen in $JNK/$LQD.  My question now is two fold.  Is the pattern in the $LQD chart just a large bull flag that will resolve itself in a show of strength after testing the 200 day, or are we seeing the start of investors pulling their money from these bond funds for fear of rising interest rates.

The second question being, if a massive amount of funds begin to flow out of corporate bonds, where will it go?  It feels as if we are towards the end of the liquidity driven rally in assets, it’s possible that it has already ended in fact.  I believe Volcker going after the banks signals this, I have commented on this in the past.  Many distressed debt hedge funds have closed their doors recently and returned money to investors, not because they failed, but because they succeeded quickly, far quicker than they expected.  Investors don’t see the same opportunities in this space that they saw a year ago.

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