Since May, we’ve been bombarded by headlines of investors liquidating bond funds, which has sent interest rates higher.
Just last week, we saw the 10-year U.S. Treasury Note yield hit 3.0% for the first time since July 2011.
The scale of bond fund outflows has been large, but relative to assets under management they are basically in line with historical patterns.
“Despite large bond outflows of -$140b since May, as a proportion of AUM they amount to only 2.9%,” wrote Deutsche Bank chief strategist Binky Chadha in his latest Asset Allocation Strategy note. “This compares to 14% in 1994-1995, 8% in 1999-2000 and 5% in 2003-2004. Also, recent outflows have only dented the substantial build up in bonds since 2009 with cumulative flows still almost a trillion dollars above trend levels.”
Having said all that, Chadha doesn’t think its time to buy bonds yet.
Outlook and strategy: another catalyst-laden fall highlighted by the FOMC, Syria and US debt ceiling will likely sustain heightened levels of volatility. But the expected turn up in the data keeps us constructive on growth assets and the USD against a backdrop of rising rates. Our positioning has worked well through this tumultuous normalization in rates. Therefore, we maintain our asset allocation: we stay underweight bonds as risk/reward remains tilted to the downside; long equities, overweight the US; overweight credit, short duration; long the USD and underweight commodities.
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