The New ‘Fight The Fed’ Trade

What if they had a selloff and nobody sold?

That seems like a bizarre proposition, but it’s actually an apt characterization of bonds this year, or at least as it relates to yields versus fund flows.

There are two main flows stories in 2023. The first is just money market flows. Around the world, more than $1 trillion flowed into money funds over the first nine months of the year.

With last week’s big haul, the YTD inflow to US “cash” funds stood at more than $970 billion.

There’s no mystery there: Cash yields are the highest in decades and government money funds have no credit risk and no duration risk either. An FDIC guarantee is just a government guarantee. Government money market funds thus have effectively the same guarantee, and federal money market funds now boast yields that are, in many cases, ~75bps above even the highest-yielding bank accounts.

The other big flows story this year is Treasurys. Needless to say, this is shaping up to be another awful year for US government bonds. Returns are -2.5% following a -13% loss in 2022 and a -2.4% loss in 2021. And yet, money continues to flow into bond funds.

According to BofA’s breakdown of EPFR data, Treasurys have taken in money for 34 straight weeks.

The figure on right gives you a sense of the situation. Treasurys took in ~$165 billion in 2022 and are on track to surpass that in 2023.

“Bears sell,” but Treasury flows are $158 billion YTD, BofA’s Michael Hartnett remarked.

Bloomberg’s ETF maven Eric Balchunas highlighted the same general dynamic this week. The figure below is rather astounding.

Balchunas called that “a top five ETF chart of the year.” Some of you might be inclined to call it a top five WTF chart.

“The divergence” between flows and performance “has cost traders $6 billion, but they keep coming back because it has to work,” Balchunas remarked. The emphasis was in the original. “This is arguably the new ‘fight the Fed’ trade.”

Hartnett summed it up. “Sure bonds [are] oversold, but investors have sold neither bonds nor stocks in 2023,” he said. “Everyone is ‘bearish’ but nobody sold.”