For an asset issued by a sovereign exhibiting signs of deteriorating governance and running an allegedly perilous fiscal position, US Treasurys sure are attracting a lot of investor cash in 2023.
Through August 9, inflows to US government bonds stood at almost $130 billion for the year, according to BofA’s tally, based on EPFR data.
Annualized, the pace works out to more than $200 billion, putting 2023 on track to set an annual record.
As the figure above from BofA shows, it’s not close. The last two years stand apart.
2023 was supposed to be “the year of the bond.” The thinking went something like this. The US economy would likely decelerate as the drag from the most aggressive Fed tightening in a generation manifested on a lag. Slower activity and the threat of a looming (if shallow) recession would send yields lower in anticipation of Fed cuts.
Instead, the US is the unquestioned macro outperformer this year, and the Fed is still wedded to “higher for longer” amid a sturdy labor market and scant evidence that the American consumer is tapped out. Longer-end US yields are near YTD highs, and US Treasurys have returned just 1%, putting them at the bottom of the pile in total return terms.
As a reminder, Treasurys have never posted three straight years of losses.
The simplest case for bonds in 2023 revolved around the idea that the unprecedented was unlikely to happen. That’s still a decent bet. But there’s a lot more to it than that.
The allure of high yields and the prospect of a rally in the event we do return to some version of a low-inflation, Great Moderation-style macro regime, is too much for many investors to resist. And that’s to say nothing of the rally that’d unfold if the US economy does experience a “hard stop” (i.e., a so-called “Wile E. Coyote” moment), triggering a Fed pivot and safe-haven demand.
Speaking of high yields and safe havens, money market funds are on track for another nice-sized quarterly haul.
Cash has seen $145 billion in new… well, in new cash QTD. That’s a brisker pace than Q2.
Global money market funds took in nearly $21 billion over the last week, according to EPFR. ICI data released late Thursday showed US money funds hauled in another $14 billion, taking total assets to a new record+ above $5.5 trillion.
Coming quickly back to bonds, 2023 certainly is “the year of the bond” vis-à-vis inflows, if not yet performance. BofA’s Michael Hartnett made the obvious quip: All that incoming cash “yet yields don’t fall.”
The complexity of market dynamics, the many choices available to allocate cash, the unpredictability of investor actions, and the everyday (and unexpected) events dampening moods in world markets may stymie my investing impulses, but at the same time it all engages me, and sometimes entertains me. What a big pot of soup!
I have a good bunch of money working for me, though some of it works better than the rest. I ride it through foggy unpredictability, believing in the reasoning behind my investment choices. The good news is that the circumstances of the economy may be foggy, but it’s not murky. Record inflow for the Treasury is not a bad thing. CPI and PPI suggest the Fed is done raising rates. The Fed pivot will come, though we can’t presume the timing. I guess this is what a soft landing looks like.
Or this is what a soft landing head fake looks like. Time will tell 🙂 But, yes, the complexity makes any straight forward read impossible. Everyone is guessing, even more so than usual.
Stock Market returns were historically put at “7%”, and while Boggle/Vanguard indexes may be the best/easiest way to achieve that, US Govt at 5% is even simpler. Buffet or Apple can generate $5B risk free by doing almost nothing and that could be 5,000 people getting a $1M salary.
Treasury yields have been flirting with the next leg up for a while after a failed attempt in the spring that was thwarted by the regional banking crisis that wasn’t. Entirely possible the release of the Fed report pushes yields to the next plateau: 2yr 5.25, 10yr 4.4, 30yr 4.5