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Bond funds attracted $409.4 billion!

Despite the market’s 74% rebound from its 12-year low in March 2009, investors were not lured back to equities.  According to Morningstar, over the past 14-months, bond mutual funds in the U.S. attracted $409.4 billion, stock funds gathered $11.7 billion.

Brad Durham, co-founder of Emerging Portfolio Fund Research Inc., a Boston-based firm that tracks investor flows worldwide into mutual funds and exchange-traded funds, said the inflows into Bond funds through yesterday (25 March 2010) are running almost five times higher than deposits during the first three months of 2009.

The surge into bonds made Bill Gross, the world best Bond fund manager, Pacific Investment Management Co (Pimco) Total Return Fund, the largest mutual fund in history with $214.3 billion as of Feb 26.  The Total Return Fund advanced 16% in the past year, beating 54% of its peers, according to Bloomberg.  As of December, Pimco, a unit of Munich-based insurer Allianz SE managed $1 Trillion in asset.

Part of the reason that investors have been putting money into bonds is to reach for higher returns as money-market funds are yielding close to zero.  However, if the rates were to go up over the next two years, it might put longer-duration bond funds to losses.

Treasuries have rallied for almost three decades, pushing the yield on the 10-year Treasury note from a high of 15.8 percent in September 1981 to 3.89 percent as of yesterday. The yield reached a record low of 2.03 percent in December 2008 during the height of the credit crunch.

In an interview with Tom Keene on Bloomberg Radio on 26 March 2010, Bill Gross said that “bonds have seen their best days.” and warned that the almost three-decade rally in fixed income has run its course may catch individual investors off guard.  The prospect of a strengthening U.S. economy and rising interest rates makes an “argument to not own as many” bonds.  Excess borrowing in nations including the U.S., U.K. and Japan will eventually lead to inflation as governments sell record amounts of debt to finance surging deficits, Gross said.

Pimco, which announced in December that it would offer stock funds, is advising investors to buy the debt of countries such as Germany and Canada that have low deficits and higher- yielding corporate securities.

Reference: Bloomberg, Sree Vidya Bhaktavatsalam and Christopher Condon, 2010-03-26,“Bill Gross Warning May Catch Bond Investors Off-Guard”,