What Would It Take to Slow Bond Flows?

Bond funds took in $357 billion in 2009.

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For the past 43 weeks, mutual funds have experienced net inflows (i.e., shareholders have invested more money than they have pulled out). The key component of this streak is abundantly clear: Bond funds have been on a tear. According to Morningstar, mutual funds took in $377 billion in 2009. Of that, $357 billion came from bond funds. U.S. stock funds, meanwhile, experienced net outflows to the tune of $25.7 billion. An interesting question, then, is: What would it take to unhinge the powerful momentum that bond funds have picked up? U.S. News asked Avi Nachmany, a cofounder of the mutual fund research and intelligence company Strategic Insight. His response: 

[See Mutual Funds: Why the Cup Is Flowing Over.] 

"Short-term rates would need to go up, in my view, to 2 percent. They would need to go up from virtually zero to 2 percent for people to start to consider other cash alternatives as a reasonable way to hold their money. We know, and this is clearly the consensus, that when short-term rates start to go up, they go up a tiny little bit, and then there will be a pause, and we're all going to sort of watch the economy for three or six months, and then maybe another quarter of a percent. So it's going to take a long, long time for the interest-rate picture to push investors away from bond mutual funds. So that's the positive side of bond mutual funds. On the stock side, assuming modest but directionally positive economic improvement, we're going to see more money going to stock funds. Maybe the first anniversary of the market bottom in March will be the trigger point for significantly more money. Bottom line: Bond fund flows will continue, stock fund flows will … improve. So I don't think you're going to see a sustained reversal of what you've observed anytime soon. Maybe [you'll have] one week of something crazy going on, but structurally, I think that the trend will continue."