Sunday, June 16, 2013

The Great Rotation has not worked out as planned

As discussed in the previous post, outflows from fixed income funds have been quite severe. However in spite of the various forecasts, the so-called "Great Rotation" out of bonds and into equities (see CNBC story from May) has not materialized. In fact just as investors put money into both bonds and stocks at the beginning of the year, more recently they have been exiting both asset classes concurrently.

Source: Investment Company Institute

The only markets that have been spared the selloff are short-term fixed income instruments (money markets) such as treasury bills. Bill rates remain near the lowest levels of the year as institutional investors who have reduced their fixed income and equity exposure, moved into the short end of the treasury curve (see discussion).

Furthermore, as institutional investors bought treasury bills, retail investors moved into their brokerage money market accounts. Retail money market funds' assets have risen sharply.

Retail money market funds total assets
(source: Investment Company Institute)

It may be a disappointment to some forecasters, but the only "great rotation" taking place recently has been out of both fixed income and equities and into money markets and other cash instruments.
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