Boston -- This year, investors are flocking to the fixed income market in droves as evidenced by weekly updates from the Lipper, which revealed that investors withdrew $2.4 billion from equity funds for the week ended Oct. 4 in search of a safe haven. But is fixed income so safe?
Not so, according to David Kelly, chief global strategist at JP Morgan Funds. Kelly, in a keynote address to industry participants at the FundForum USA CEO Though Leadership Summit in Boston, said that investors are pouring money into cash and fixed income markets despite rising risks and low returns. “People are putting too much money into fixed income because they don’t understand that there is risk in the bond markets, and that scares me,” he said.
According to Kelly, S&P 500 has returned 16.4% YTD but despite that “money is flowing out of equity funds and into bonds at a stronger pace this year than in any of the last five years.”
He said the biggest misperception investors have is moving into the safety of bonds. In fact, he noted that bond yields have been falling since Sept. 30, 1981, when the 10-year Treasury note hit its all-time high yield of 15.84%. “That 31-year bull market squeezed all of the return out of the bond market and replaced it with risk. We have gone through a generation of falling yields. I just wish we could get people ove these dangerous, dangerous preconceptions,” he said.
To be sure, Kelly said that high yield bonds will actually make some money over the next few years but high quality corporate bonds is going to be a money-losing proposition. “People need to be diversified,” he said.