Bond ETF Bubble Dwarfs 90s Equity Bubble - INTL FCStone

There is a massive Fixed Income ETF bubble brewing, Vincent Deluard, Vice President, Global Macro Strategy at INTL FCStone Financial said in the firm's monthly flow report Wednesday.

Deluard said to the casual observer the biggest ETF story of the year would the massive inflows into equity funds, which have attracted $177 billion since Donald Trump was elected president. However, Fixed income ETFs issued $112 billion. This represents 17% of assets, versus just 12% for equity funds. The bond inflows are even more notable as the asset class has done nothing, rising just 0.9% during the time-frame, versus a 17% gain for the S&P 500.

Another key difference between the two is that the inflows into equity ETFs simply offset outflows from mutual funds. By contrast, bond mutual funds have also been gathering assets – not as quickly as ETFs, but they still took in a net $19.7 billion since the start of 2015.

"Flows into bond funds (both ETF and mutual funds) accelerated to about $1 billion daily since the start of 2016: this realization should erase any worry about the difficulty of scaling back the Fed’s gargantuan balance sheet," Deluard comments. "According to the Fed’s Policy Normalization Principles and Plans, net sales of treasuries from the Federal reserve should start at just $6 billion a month – or about a week of fund demand."

So how big is the bubble? Data shows that the bond bubble easily tops the 90s equity bubble. According to the Fed’s Flow of Funds, U.S. households poured $5.4 trillion into equity funds between 1992 and 2001. Meanwhile, households added a staggering $8.9 trillion to their bond holdings since 2008.

"The two bubbles share the same demographic explanation: in the 90s, America’s greatest generation was in its 40s and the great moderation of the productivity miracle offered the promise of permanently higher economic growth. Both demographic and sentimental factors pushed boomers into equities. 20 years later, these boomers approached retirement and needed income."

You May Also Be Interested In

• SEI Investments (SEIC) PT Lowered to $69 at Piper Sandler
• Global S&P Futures mixed in premarket
• Visa (V) stock rises as Q2 earnings, revenue come ahead of estimates