Individual investors have been shifting to stocks from bonds as well. The gap between flows into bond mutual funds and exchange-traded funds and those focused on equities widened to $70 billion in June, the most ever, according to JPMorgan analysts led by Nikolaos Panigirtzoglou in London.
‘Great Rotation’
“Retail investors have embraced the Great Rotation over the past two months,” they wrote in an Aug. 7 report. “It represents the biggest behavioral change by retail investors since the Lehman crisis.”
Yields are rising from record lows as U.S. central bankers debate slowing monthly bond purchases, which have pumped about $2.6 trillion into the financial system since the failure of Lehman Brothers Holdings Inc. deepened the 2008 credit seizure. The 2.6 percent loss this year in dollar-denominated corporate, government and mortgage debt compares with a 3.8 percent gain in the same period of 2012 on the Bank of America Merrill Lynch U.S. Broad Market Index.
Morgan Stanley Wealth Management changed its recommendation to moderate high net-worth clients in March, advising them to place 30 percent of their money in bonds and 42 percent in stocks, Darst said. Last year, the advice was reversed, with 42 percent in bonds and 30 percent in stocks. The firm would consider further decreasing the allocation to debt if strategists sensed that interest rates were poised to rise more quickly, he said.
Sales Slowing
“If we felt that we were going to have a quick move over the next year or two, I think the inclination would be to reduce it even further to move it into cash and then back into bonds or into stocks,” Darst said. It’s important to have some debt holdings because “there is deflation risk and you want to have some insurance in case you’re wrong.”
Bond issuance is slowing as borrowing costs increase. While U.S. companies and government entities sold debt at the fastest pace since 2009 in the first half of the year, this month’s $29.7 billion of sales is 6.3 percent less than during the same period in 2012, Bloomberg data show.
“U.S pension funds and insurance companies have been steadily accepting higher equity allocations and lower bond allocations” since the third quarter of 2011, JPMorgan global asset allocation strategists wrote in the Aug. 7 report. The trend accelerated in the first quarter, they wrote.