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Mark Hulbert
Nov. 29, 2010, 11:01 p.m. EST
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By Mark Hulbert, MarketWatch
CHAPEL HILL, NC (MarketWatch) "” Is the Great Bond Bull Market finally coming to an end?
Countless commentators (myself included) in recent months have concluded that it has, though in retrospect we've at best been premature "” if not outright wrong.
But there is the distinct possibility that this time may be different: The tide appears to be turning in the huge flow of funds into bond mutual funds and ETFs.
That fund inflow "” better described as a tsunami "” has been widely noted over the past couple of years, of course, during which investors exhibited an insatiable appetite for bond funds, consistently transferring more money into those funds than they withdrew.
In fact, according to TrimTabs Investment Research, a quantitative research firm, the sustained period of fund inflows into bond funds began nearly two years ago, in mid-December of 2008. The only other occasion in recent stock market history that even comes close to matching this, according to Vincent Deluard, Executive Vice President at Trim Tabs, is the sustained period of fund flows into stock mutual funds in the late 1990s leading up to the bursting of the Internet bubble.
That's an ominous parallel, of course.
But especially now, given that the string of weekly inflows into bond funds has finally been broken. That string, for those of you keeping score, was for 99 straight weeks.
It came to an end in the week ending Nov. 17. For that week, Trim Tabs estimates that $4.3 billion was pulled out of open-end bond funds in the U.S. Though the pace of this outflow did not continue in the week ending Nov. 24, it didn't reverse itself either: Though TrimTabs estimates that there was a tiny inflow of $207 million into open-end bond bunds in that week, it was more than counterbalanced by a $592 million outflow from bond-oriented exchange-traded funds.
What makes the bond market particularly vulnerable to this nascent turning of the tide is that it wouldn't take much to turn it into an avalanche just as big as the previous inflow. In an interview, Deluard pointed out that it's been 26 years since the bond market suffered a "really severe correction. That means that the vast majority of investors in bond funds have never lived through a decline of that severity. This in turn means that, should a decline begin to gather steam, these inexperienced investors could easily panic and dump much of their bond fund holdings in very short order."
That would cause the bond market to fall even faster, of course.
To be sure, a two-week outflow doesn't in and of itself reverse 99 weeks of inflows. Nevertheless, given how precarious the situation is, what with huge inflows from inexperienced investors who could easily panic, it certainly appears as though the bond market is at a tipping point. If so, it won't take much to precipitate a huge rout in the bond market.
"They don't ring a bell at market tops," goes the old Wall Street saw. Nevertheless, if indeed a major bond bear market has begun, the outflows over the last two weeks might eventually be seen in retrospect as very close to just such a bell.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
As the legendary VC firm has missed a couple of big Internet startups, maybe Mary Meeker will help it catch the next new new thing
2:03 p.m. Nov. 29, 2010
- vdeitchman | 11:31 p.m. Nov. 29, 2010
"Mark Hulbert: The shifting tides of bond fund flows http://on.mktw.net/gxGouJ" 11:42 p.m. EST, Nov. 29, 2010 from MktwHulbert
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