Air keeps coming out of the bond bubble

The air came out of the bond bubble last month, when bond funds recorded the highest five-week outflows in three years and a half, according to capital flows data analysed by Bank of America Merrill Lynch economists.

Precious metals also saw the biggest three-week outflows in three years and a half, while equities, normally the first asset class to be abandoned by skittish investors, saw the largest four-week inflows in two years.

In the week that ended on November 30, bond funds saw outflows worth $4.4 billion, precious metals lost $0.6 billion, while equities saw $1.2 billion pouring in.

Looking at where exactly in equities the money goes, US stocks took $4.4 billion, posting inflows for four straight weeks.

European equities, battling uncertainty caused by the Brexit vote but also by the Italian constitutional referendum, saw $2 billion in withdrawals, in the week, the largest in 11 weeks. This represents close to ideal conditions for contrarians thinking of diving in.

Looking at what sectors the money went to, the pattern fits the current rotation in the market. Financials saw 10 weeks in a row of inflows and took in another $600 million last week, on the back of hopes that financial repression is over, interest rates have hit the floor and they can only go higher from here.

If the Fed raises interest rates again in December, as the market seems to be pricing in, those hopes will be justified. But this would be bad news for the housing market; over the past few years, buyers had to take on more and more debt to keep up with price increases, and they will now have to pay higher rates to service this debt.

This is probably why investors are leaving real estate investment trusts (REITs). They have seen four straight weeks of outflows and in the week that ended on November 30, they lost another $100 million.