A couple of days ago in “One Word And One Word Only: ‘Duration’,” we noted that when central banks pull the punch bowl, you’d better not have your hand in the duration cookie jar.
Here’s how BofAML explained things:
US elections, the global reflation trade and rising political risk (Nov’2016 — now):Recently we have seen a very strong bid for short-dated IG bonds. Investors are trying to cut duration risk as (i) rates have moved aggressively higher and more importantly (ii) curves have steepened in the past couple of months.
In short, investors were “buying” the reflation narrative (figuratively and literally) as evidenced by their decreasing appetite for duration.
Well, in the week ended Wednesday, it looks like things turned around in rather dramatic fashion. Here’s BofAML’s European credit strategy team:
Investors are embracing duration again. Inflows into mid and long-term funds have been the strongest since last August. As we have discussed extensively, when rates market become more stable, investors would be back into the belly and the back-end of the curve. On the duration front, inflows continued in short-term IG funds for the 15th week in a row, nevertheless the inflow strength decreased dramatically compared to other parts of the curve and compared to its own previous inflow trend. Mid-term funds posted a strong return to positive flows with the highest inflow in eight weeks. Flows in longterm funds were also strongly positive, the strongest in 34 weeks.
Which leads directly to the following question: does this mean investors interpreted the failure of the GOP health bill as a signal that the US is in no position to usher in a renaissance in global growth and thus central banks will be forced to stop the policy normalization process before it even gets started?
