BANK OF AMERICA: It's 'capitulation' in the bond market

Investors are shifting their money in the bond market as though we’re in a recession.

Bank of America Merrill Lynch strategist Michael Hartnett says that the week of January 20 saw “huge” inflows of $5.1 billion into Treasury and government bond funds.

At the same time, funds are also flowing out of the riskier high-yield market at 12 month high pace.

In fact, outflows from the high-yield market over the past seven weeks amounts to around 5% of assets under management. That’s “capitulation,” according to Hartnett, who described the flows out of riskier assets and flows into lower-yielding government bonds as “recessionary.”

There were also “chunky outflows” from emerging market debt, with $2.3 billion leaving the market, the largest outflow in 20 weeks. Money has now left emerging market debt funds in 23 of the past 26 weeks.

As the chart below shows, flows into yield investments are falling like dominoes. First, there were emerging market debt outflows, and now the high-yield market has capitulated. At the moment, flows in to real-estate investment trusts are resilient.

While the bond market is acting as though there is a recession on the way, the equity market is not.

Selling in the equity market isn’t close to the “capitulation” levels in junk bonds. Equity funds saw $3.5 billion in weekly outflows, taking outflows over the past three weeks to $24 billion, equivalent to just 0.3% of assets under management.

Its still well below levels in previous market panics. Hartnett said in a note earlier in the week that investors were not yet “max bearish”, adding that investors are “stubbornly long tech, Eurozone & Japanese stocks,” which are most vulnerable to a recession.

“Positioning jerkily, reluctantly adjusting to 2016 bear market & profit recession,” the note said.

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