Fund flows: cracks starting to show in bond funds. I've been watching fund flows carefully for any signs of a "Grand Rotation" out of bonds and into stocks.
It's not happening yet, but there are signs of trouble for bonds.
First, here's the good news: everyone wins this week! There were Inflows into stock and bond funds. Lipper reporting that for the week ending this Wednesday, there were inflows into stock and bond ETFs, and stock and bond mutual funds.
Mutual Fund Inflows:
- Stock Funds$3.17B
- Bond Funds$3.5B
- Stock ETFs$2.5B
- Bond ETFs$1.7B
This is the continuation of a trend that has gone on since the beginning of the year. For the year to date, $85 billion has flowed into all equities fund (mutual funds and ETFs)...compared to $26 billion of inflows for the same period last year. That is a substantial difference.
However, there is still no sign of the "Great Rotation" out of bonds and into stocks. Bond funds (mutual funds and ETFs) are still seeing inflows of $64 billion...a tad lower than the roughly $70 billion for the same period last year, but not by much.
But cracks are starting to show in bonds. Bond ETFs have had an ugly week...most of the big funds are now down six days in a row. The iShares 20 Year Treasury ETF (TLT) is down 3.9 percent this week, the10-20 Year Treasury ETF (TLH) is down 2.6 percent, and the 7-10 Year Treasury ETF (IEF) is down 1.6 percent.
Even the biggest corporate bond fund, iShares Investment Grade Corporate Bond ETF (LQD), is down 1.4 percent. Down 1.4 percent is a lot for a fund that yields 3.5 percent.
What's this mean? While there has not been significant redemptions from any of these funds yet, being down six days in a rose is bound to start raising some eyebrows.
How long will investors put up with these kinds of declines? These bond ETFs will be the canary in the coal mine.
Markets today: economy improving. Now, can we have a mini-Grand Bargain? Some are concerned that the strong numbers indicate the Fed might end its bond-buying program. Citigroup (C) echoed this in a note this morning, saying that today's data strengthens "the case for the Fed tapering off the size of asset purchases within 2013."
But that's not a concern for the moment. Concentrate instead on the better economic numbers we have seen: Jobs, ISM, and Consumer Confidence. Adrian Miller from GMP Securities, in a note to clients: "...if the current pace of hiring as represented by February's report turns out to be sustainable going forward, (a big "if"), and Washington can make progress in its budget negotiations, upside revision to our full-year GDP estimate of 2.2% will be warranted as well as our earnings expectations."
Washington: a mini-Grand Bargain? On Tuesday, when the Dow Industrial Average hit historic highs, I noted that one of the biggest factors for a sustained bull market was clarification from Washington. A Grand Bargain that would encompass 1) deficit reduction over 10 years (tax reform, entitlement reform, and discretionary spending reform in areas like defense), and 2) extension on the debt ceiling for, say, two years.
Those odds are improving. Greg Valliere from Potomac Research gives 60 percent odds that a "modest deal," a mini-Grand Bargain, will be reached in Washington: perhaps an $800 billion package that would eliminate the sequester for years to come. Valliere notes it could include entitlement reforms, (Social Security COLA change and Medicare savings), a few spending cuts (farm subsidies, defense, etc.) and a few tax loophole closers. That deal could pass by summer.
—By CNBC's Bob Pisani