The frequently predicted but so-far invisible “Great Rotation” has found new life since the presidential election.
Still missing, however, is evidence that it’s actually occurring.
The long-held concept of investors abandoning bonds and fleeing to equities en masse was on life support until the presidential election. Since then, however, pundits have predicted that President-elect Donald Trump’s support of significant spending on infrastructure and tax cuts would spur higher growth, fuel inflation and erode bond prices.
We’re not so sure.
Putting inflows into perspective
Take a look at the past two years. In the first 11 months of last year, there were $203.7 billion of inflows into fixed-income funds, and $41.8 billion of outflows from U.S. equity funds, according to data cited by CNBC.
In 2015, the story was the same: bond funds (municipal and taxable) attracted $46.1 billion while equity funds suffered $66.5 in outflows.
Hardly proof of a reversal in investor sentiment.
Indeed, shortly before the election in November and immediately afterward, bond yields rose, so the narrative was that the Trump administration would usher in a new era of inflation, interest rates would surge and the Great Rotation would finally occur.
Yet as we discussed (Post-Election Outlook for Municipal Bonds), Treasury yields had been increasing since the summer, and the decline in prices – which move in the opposite direction as yields – fell within the range of what would be considered a normal correction.
Now, yields have slid for a month and the 30-year Treasury bond is back under 3.00%.
Factors working against a bond rotation
There are a number of factors working against a significant “rotation,” as a recent analysis by a Goldman Sachs analyst pointed out.
The Federal Reserve, for example, owns a significant amount of Treasury and agency bonds and is barred by law from investing in equities. Insurance companies, another large holder of debt, are required to balance their risk, making a pivot to stocks, which are more costly for them to own, unlikely.
Further, debt holdings by pension funds and households are at historically low levels, and a further reduction is unlikely.
Muni bond investing and the hazards of guessing
Market timing, as we often point out, is foolhardy. Keep in mind, the concept of a Great Rotation was coined six years ago and the phrase “rising interest rate environment” is even older than that.
U.S. growth remains anemic, as does inflation, and any rise in wages has been tepid while, for the most part, economic expansion overseas ranges from modest to weak.
Municipal bond investors trying to time the market by predicting the new president’s policies, his relationship with Congress and a host of other political and economic factors that may or may not be relevant, will be frustrated.
The best bet is to take advantage of quality issues now, at yields that actually exist, and ignore the crystal ball gazers.