In case you didn’t get the memo: The bubble in bonds isn’t ready to burst just yet and falling stock prices are a big reason why. Spiking volatility coupled with sliding global stock prices has lifted bond prices higher.
The Vanguard Total Bond Market ETF (BND) has gained nearly 3% since the start of the year while the Vanguard Total World Stock ETF (VT) has dropped 4.7%. During the past 20 trading sessions, bonds have outperformed stocks by 8.3%. This is the weakest performance for stocks relative to bonds over the past two years.
Even before the current hysteria surrounding the coronavirus outbreak, investors were dumping money into bonds. During January, just over $1.8 billion flowed into ETFs tracking government bonds, the most in three months, according to Bloomberg data. Likewise, highly rated investment-grade debt vacuumed up $15.6 billion, exceeding mid-2019 inflows.
Last year, record asset flows of $150 billion flooded into bond ETFs, the most since 2014. The furious pace set thus far in 2020 marked by even more money going into bond ETFs is impressive given the context of last year’s record.
Is this time different?
Curiously, last year’s record asset flows into bond ETFs happened as stock prices were soaring. The Schwab U.S. Broad Market ETF (SCHB) gained 30.8% last year compared to a gain of just 8.8% for BND. In a way, bond ETF asset flows were a contrarian indicator.
This time around, souring investor sentiment has boosted the demand for bond ETFs. The CNN Fear and Greed Index, which uses seven different factors to measure the market’s mood, is currently in extremely fearful territory at 21. A reading of 0 is the most fearful while 100 is greedy. One month ago, the index was in the greedy zone at 62.
What segments of the bond market have been the strongest performers? Atop the list are the iShares 20+ Year U.S. Treasury Bond ETF (TLT) and Vanguard Extended Duration Treasury ETF (EDV). TLT has jumped 14.1% year-to-date while EDV is ahead by 18.7%. EDV owns 20- to 30-year Treasury STRIPS, which are zero-coupon securities that don’t offer interest payments. STRIPS are purchased at a deep discount from their face value, or par value. After the bonds mature, investors receive the full face value.
Strategic traders looking to capitalize on rising bond prices have done well thus far. The Direxion Daily 20 Year Treasury Bull 3x Shares (TMF) has spiked 34.8% year-to-date. TMF aims for triple daily performance to long-term U.S. Treasuries. Should prices on long-term Treasuries rise 1% on any given day, TMF is designed to gain 3%. Conversely, if these same Treasuries fall by 1%, TMF will decline by 3%.
Is the growth in bond ETFs tapped out?