Behind the Money

Corporate Bond Funds Draw Record Amount of Investor Cash


Investors put a record amount of money into investment-grade bond funds this week as corporate bonds solidified their reputation as the best place to generate income with the least risk.

Handing money over
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A record $3.3 billion flowed into U.S. investment-grade corporate bond mutual funds, blowing past the previous record of $2.6 billion last June, according to data from Bank of America Merrill Lynch and EPFR Global.

What’s more, the funds have seen net inflows of more than $1 billion during each week this year, adding 1 percent to total assets for the sector, according to the data.

“This has been a staple of my client accounts for many years and in the current environment of strong earnings and cash-rich balance sheets, this space makes more sense than at any time I could recall,” said Mitch Goldberg, president of ClientFirst Strategy. “As money shifts away from Treasuries, the money allocated to fixed income should be shifted into corporates.”

It seems record cash hoards by companies, combined with a modest economic recovery mark the sweet spot for corporate bond funds.

The iShares Investment Grade Bond ETF is up 7 percent in 12 months, compared to just a 1.4 percent return for S&P 500 SPDR.

While bond funds have seen a steady flow of cash, equity mutual fund inflows have only recently gotten some respect, especially after the 8 percent increase in the S&P 500 so far in 2012.

Equity mutual funds had a $3.6 billion net inflow during the first week of February, according to data by the Investment Company Institute after an annual net outflow in 2011.

Some investors believe this record inflow into corporate bonds may mark the top in that asset class and that the better choice now is under-owned stocks.

“It is hard to make a serious case for interest rates to go lower from here,” said David Fried, president of The Buyback Letter. “One could argue that interest rates may stay at these levels for a year or so, but that is about it. Therefore, bonds of any duration over a few years are subject to having their values degraded over time. When you add to this the management fees for bond funds, these bond funds are not a great idea.”

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