Market participants are likely to be unprepared when the Federal Reserve raises rates more than a couple more times. Flow data indicates that investors have been pouring money into bond funds this year and losing interest in bank products, with the exception of certificates of deposit.
Demand for bonds was extremely heavy this year through October despite historically low yields and poor performance. The inflow of $42.4 billion last month was the biggest monthly inflow since October 2009 and the 10th consecutive monthly inflow exceeding $25 billion. This year’s inflows have averaged $34.5 billion per month, up from $7.2 billion in 2014, $2.9 billion in 2015 and $16.4 billion in 2016. This year’s inflow is set to be among the three highest on record.
Inflows into savings accounts have fallen sharply even though yields have been rising. The outflow of $3.4 billion in October was the third monthly outflow in the past six months. This year’s average monthly inflow of $22.5 billion is down from the average of $37.5 billion in 2014, $50 billion in 2015 and $54 billion in 2016. This year’s inflow is set to be the lowest since 2007.