Bond flows

The situation for bonds is appreciably different. If we construct the same sort of rolling 12-month sum ratio as we did for stocks, we find there was only one period of distortion: during the early phases of the Federal Reserve’s 2004-2006 rate-hike campaign. Some of the ratios went off-scale and are marked on the charts with green bars.

The U.S. bond fund investor acts indifferent to changes in performance as measured by the total return on the Merrill Lynch index of A-rated corporate and government bonds. Funds do not follow performance one way or the other.

We can reach the same conclusion with respect to the dollar index. During the trough of the dollar’s late-2004 sell off, net inflows into U.S. bond funds turned negative. This reversed quickly, and the previous stasis was restored.

While currency movements are determined in part by relative prospective returns on assets between two economies, mutual fund flows appear to be a poor way of measuring those returns. Other metrics, such as forward looking price/earnings ratios or yield-curve shapes do a better job in this regard.