Record inflows into bonds as Bull-Bear indicator approaches sell signal

The first year of the new decade begins with markets in a much more exuberant mood than at the beginning of 2019. Some of the world’s most important stock markets reached record highs in the last month of 2019 — but do investors feel that markets have peaked?

Equities funds saw redemptions in the first trading week of the new decade, while bond funds saw record inflows, despite the widely known and widespread issue of negative yields for bonds.

Inflows into bonds were $23.2 billion, whereas equity funds saw about $500 million withdrawn, according to data analysed by BofA Global Research. Bond inflows last year totalled $482 billion.

Investment grade bonds saw their biggest inflow ever, worth $14.1 billion, while muni bonds also hit a record $2.3 billion funds attracted in the first week of the year.

“Maximum liquidity, minimal growth” are what analysts believe is behind the bullish price action, with quantitative easing from the major central banks – the Fed, the European Central Bank and the Bank of Japan at a “stunning” $1.1 trillion, and with global central banks having cut rates 80 times in the past 12 months.

All this contributed to reducing worries about recession and defaults but also, perhaps paradoxically with all this money-printing going on, fears of inflation for 2020.

Are investors getting too bullish? Perhaps. The BofA Bull & Bear Indicator is getting close to triggering a “sell” signal, having risen to 6.5.

Bull&Bear Indicator Jan 11 2020

The Bull & Bear Indicator is nearing a “sell” signal. Source: BofA Global Research.

Investors are most bullish since March 2018, but have not yet pushed sentiment above the threshold needed to trigger the “sell” signal.

According to the BofA Global Research analysts, investors would need to pour another $20 billion into risky assets such as high yield bonds or emerging market debt in the next four weeks to push the indicator over the 8 level into the “extreme bullish” territory.

Interestingly, the research highlights the fact that there always seems to be a bubble in something in the ‘20s: in the 1720s, the South Sea Company, in the 1820s, UK mining stocks, in the 1920s, the Dow Jones.

How can investors tell when the market is close to the peak? According to BofA Global Research, they should take a clue from 2018, when underperformance of high yield bonds, semiconductors, homebuilders and banks was the prelude to the market top.