CHART OF THE DAY: Here's How Bonds Got To Be Ridiculously Expensive Compared To Stocks

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Jeremy Grantham said in his latest quarterly letter that bonds are now overvalued relative to stocks. He generally prefers U.S. quality companies over bonds. Here’s a potential reason why markets have reached this point.

Despite the recent stock market rally, whereby September was the best month in seven decades, U.S. domestic stock funds are still bleeding investor assets.

Latest fund flow data from the Investment Company Institute (ICI) shows how U.S. stock funds’ flows have continued to be negative, even during the first two weeks of October, as they have been for most of the year. Fund flows for U.S. equity funds were net-negative in 2008, 2009, and now have been the same for 2010 thus far.

Below we show the cumulative effect of this, since the beginning of 2008.  Cumulative fund flows over the period equaled -$245.8 billion based on ICI data, as shown in red.

Meanwhile, fund flows into bond funds have continued to be positive this year. Cumulative flows for bond funds since the beginning fo 2008 have equaled +$632.15 billion, as shown in grey.

So despite any sense in the market right now that investors are starting to get too bullish, ICI data at least paints a different picture — Investors as a whole continue to pare back their equity mutual funds and deploy additional money into bond funds. More of the same pessimism towards stocks and love for bonds.

Just note that the data below doesn’t include ETFs, where fund flows for U.S. domestic stock ETFs went positive recently. So maybe we’ll soon see the fund flows go positive in a meaningful way for domestic stock mutual funds, but it doesn’t appear to have happened yet.

chart of the day, fund flows into mutual funds, oct 2010

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