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    Investors, playing it safe, still pick bonds

    Stock market volatility and the most recent recession have made bonds especially appealing since 2008.
    David Karp/Associated Press/File
    Stock market volatility and the most recent recession have made bonds especially appealing since 2008.

    Market pros call it the Great Rotation. That’s the long-awaited scenario when investors take their money out of bonds and sink it into stocks.

    It was the buzzword this month when the Dow average reached a record high. The idea was that investors were confident enough in the economy to shed their financial crisis fears and leave the safety of bonds.

    But it’s not happening.


    Money keeps flowing into bonds. Industry consultant Strategic Insight says US bond mutual funds have attracted $64 billion in cash in the first two months of the year, just below last year’s pace of $68 billion over the same period.

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    Stock mutual funds had net deposits of $76 billion through February, according to the consultancy. While that is up sharply from $14 billion a year earlier, the cash for stocks is not coming at the expense of bonds, according to more recent snapshots of investment flows.

    Instead, investors are withdrawing from money-market funds, which are often used as a parking spot for cash, according to EPFR Global.

    ‘‘The expectations of a big exodus from bonds are way overblown,’’ says David Santschi, chief executive of TrimTabs Investment Research, a fund-tracking firm.

    A stock market crash and recession have made bonds especially appealing since 2008, when the nation was in the throes of the financial crisis. The abundance of buyers has pushed bond prices up and sent yields lower, reducing interest payments to investors.


    Even with low yields, bonds will continue to attract retiring baby boomers and others who want reliable income for daily expenses. The yield on the 10-year Treasury note — a benchmark — is hovering under 2 percent. Other types offer higher yields. Investment-grade corporate bonds yield 3 percent and riskier ‘‘junk’’ bonds yield just under 6 percent.

    Still, the Dow’s record surge is drawing more attention to stocks.

    Investors added $8 billion to US stock funds and exchange-traded funds in February. And they’re putting in more cash this month, as $12 billion flowed into stock funds and ETFs through Tuesday, according to EPFR.

    Bond funds, including ETFs, have pulled in nearly $8 billion this month.

    Withdrawals from money-market accounts that didn’t go directly into stock or bond mutual funds could have gone into bank accounts, covered daily expenses or been used for other needs. Investors also could have used the money to buys stocks or bonds directly rather than through funds.


    If the money keeps flowing, this would be the first year since 2006 that more cash was invested in US stock funds than withdrawn from them, according to Strategic Insight.

    The market’s gains over the past four years could have been larger, had individuals been investing more in stock mutual funds. In the run-up, much of the buying has come from companies repurchasing their own stock. Companies in the S&P 500 have bought $1.5 trillion since the Great Recession began in December 2007.

    There is more fuel for stocks to continue soaring. Dividend payments are headed for a record year and companies keep buying back stock. Boards approved $118 billion in buybacks last month, the largest single-month total ever, according to the research firm Birinyi Associates.

    Matthew Lemieux, an analyst with fund tracker Lipper Inc., warns that the increased investment in stock mutual funds doesn’t mean the Great Rotation is coming.

    At the beginning of 2011, stock funds attracted cash four months in a row, the strongest start to a year since 2006. But the cash began to dry up in the spring and summer. Investors worried about the debt crisis in Europe and a fight between Congress and the White House over raising the government’s borrowing limit.

    Stocks have pulled back slightly over the past week amid renewed concerns about Europe and the possibility of bankruptcy in Cyprus.