A sustained recovery in US 10-year bond yields to 2.5% could drive a rotation of $250 billion from developed market bond funds into developed market equities according to proprietary analysis from Deutsche Bank.
This forecast was published in the bank’s weekly fund flows research note, which is published at the beginning of every week and this week features a detailed analysis of bond-equity rotations.
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Rising Bond Yields Could Send $250 Billion Into Equity Funds
Data compiled by the bank’s analysts shows that there have been four major developed market bond-stock rotations since the beginning of 2007. The first took place towards the end of 2008 when around $100 billion of assets rotated from bonds into equities. The next occurred at the end of 2010 when a similar rotation took place. The 2013 Taper Tantrum has been the past decade’s most aggressive rotation. During this period, nearly $400 billion flowed from developed market bond funds into developed market equity funds. After the 2013 rotation, the Bund tantrum at the beginning of 2015 was the next large rotation before the rush for yield resumed taking developed market bond fund flows to a new all-time high.
Over the past few weeks, the credit market has experienced one of the largest selloff’s of all time (on a percentage basis comparing before and after yields), and this is already driving a renewed great rotation from bonds to equities. Deutsche’s analysis shows that in all past rotations since 2007, Financials and Industrial Goods have been the sectors that have benefited the most. On average, these two sectors have experienced annualized inflows of 25% and 18% of their net asset values respectively as investors have rushed to try and profit from higher rates. Meanwhile, Utilities and Telecoms have been the sectors that have suffered most with redemptions totaling 8% and 10% on average during rotations.
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Still, when it comes down to which asset class has attracted the most assets this year, bond funds still stand head and shoulders above equities. Year-to-date all of the equity funds monitored by Deutsche (including ETFs) have seen outflows of 1.5% of assets under management. In comparison bond funds have reported inflows of 4%. The funds that have suffered most are those equity funds focused on Western Europe and Asia ex-Japan. These two classes have lost 9.4% and 6% of assets under management respectively. Meanwhile, emerging market bond funds have reported inflows of 9% of assets under management and Latin America equity funds have seen inflows of 5.4%, although these hardly make up for the outflows of -23%, -16% and -20% for 2015 and 2014 and 2013 respectively.
By Rupert Hargreaves
