Retail investors are selling bond funds. Should you buy?
Retail investors are running for the doors when it comes to bond funds. So, is this a contrarian sign to buy or do the masses have it right this time?
According to data by TrimTabs Investment Research, retail investors have pulled out more than 45.7 billion from mutual funds and ETFs that invest in bonds. This reverses the trend from much of the year, where investors have been buying bonds.
The big reason for the selloff is one word: tapering. Back in May, Federal Reserve Bank Chairman Ben Bernanke suggested to congress that the Fed may soon taper its $85 billion per month bond buying program dubbed “quantitative easing” (or “QE”).
The Fed implemented QE to add dollars into the financial system while lowering interest rates. Bond yields are inversely related to bond prices so when the costs of bonds went up, the return as a percentage of prices went down. Once the markets began contemplating a world where the Fed will buy fewer bonds, a selloff began, more than doubling interest rates on the US Treasury 10-Year Note from nearly 1.4% last year to around 2.85% today.
With the Fed potentially backing away slowly from the bond market, does that mean the public has it right now and bond funds are a sell? Or is this a contrarian buying opportunity.
To answer this question are John Stephenson, portfolio manager at First Asset Investment Management, and Jonathan Krinsky, Chief Technical Market Analyst at Miller Tabak. Stephenson looks at the bond market’s fundamentals while Krinsky examines the charts on the US Treasury’s 10-Year Note.
Watch the video above to hear Stephenson and Krinsky analyze what’s next for bonds and whether it’s a good opportunity to buy them on the cheap or is it the start of a bigger drop.