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Categorized | Capital Markets

Investors move out of cash and into bonds

Posted on June 30, 2013

Investors switched billions of dollars out of the safety of cash into bonds as well as equity funds in the first half of this year, before the US Federal Reserve created market uncertainty by hinting at a possible slowdown in quantitative easing.

Data for the first half of the year show that 2013 has not seen the sort of “great rotation” – a switch out of bonds and into equities – forecast by some strategists. Instead investors moved out of cash into both equity and bonds funds, and particularly high-yielding fixed income, on the back of an improvement in sentiment encouraged by rising hopes of an economic recovery, according to Goldman Sachs Asset Management.

    Globally, investors pumped $216.1bn into equities and $249.4bn into bonds, Goldman Sachs’ analysis of funds data shows. Mixed portfolios, which include a combination of equities and bonds, enjoyed inflows of $78.8bn. At the same time, investors withdrew $92.3bn from money market funds, which are considered a proxy for cash, as they sought riskier assets that offered better returns.

    Investors also pulled $16.3bn out of alternative investments, which include commodities and hedge funds. Some hedge funds remain affected by poor returns in recent years. Commodities such as gold have also suffered as, like cash, the metal does not offer investors yield.

    “The numbers don’t lie. There have been very good inflows into bonds and equities, which have come out of money market funds,” said Andrew Wilson, chief executive of Goldman Sachs Asset Management for the European, Middle East and Africa region.

    “With near zero [interest] rates and the prospect that rates are staying low, investors want to generate higher returns. This has prompted switching into equity and higher yielding bonds.”

    The flows have gone into reverse over the past month, according to the Goldman Sachs Asset Management analysis, following hints by Ben Bernanke, Fed chairman, about a possible “tapering,” or the winding down, of QE later this year. QE, which involves the injection of billions of dollars into the financial system, has been a big prop for markets since it was introduced by the UK and the US in March 2009.

    Outflows in June were $42bn in bonds, $21bn in money market funds and $19bn in equities. Alternatives were only a fraction down, while mixed assets were slightly up.

    However, Goldman Sachs Asset Management argued the outflows in June may have been a blip rather than marking a change into trend as there was a hardening view that markets had overreacted to Mr Bernanke’s comments and sold off more sharply than his signals justified.

    “We have to remember the Fed is moving from being extremely accommodating to less accommodating,” Mr Wilson said. “This is not a signal for tightening, so the initial sell-off because of Mr Bernanke’s comments was a little overdone. Flows may start to go positive again, although it depends on the economic numbers.”