BAML: Startled investors are pumping billions into bonds and precious metals

The financial world is being turned upside down by low interest rates and negative yielding bonds, driven by panicky investors rushing into bonds and gold.

The UK’s vote to leave the European Union last month cast a shadow over the global economy and gave investors more reasons to be worried about the stability of the financial sector.

From plunging bank stocks to frozen real estate funds, it’s looking grim.

Any future central bank rate rises have now been postponed until at least next year, and investors, seeking refuge from risky assets such as stocks, flocked into gold and bonds.

As panicky investors bought more bonds, they pushed up the price and pushed down the yield. Now more than $12 trillion of government bonds are negative yielding.

No-one really wins, especially not the savers. Bank of America Merrill Lynch, in a note to clients published on Friday, calculated it now takes 1387 years to double your savings in one-year German deposit account and 6932 years to double them in a Japanese one-year savings account.

Here’s BAML’s Michael Hartnett and Brian Leung:

“Incited by the belief that every single interest rate in the world is heading to zero, the Mountain of Cash on the sidelines has induced fresh “irrational upside” in government & corporate bonds, and high quality & high yield stocks (e.g. IG bonds, HY bonds, REITs, utility & staples stocks have all just hit all-time highs).”

According to BAML, bond funds saw inflows of $14.4 billion last week, the most since January 2015, and precious metals funds had inflows of $4.4 billion, the most in a week since data began in 2005.

Here’s the chart:

Gold is the asset to own, according to Swiss bank UBS. It has “entered a new phase,” the bank said in a note this week,increasing its annual forecast for gold to an average of $1280 per ounce, compared to $1225 previously.

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