Fund Flows And Bond Yields. Two Different Stories

While bond yields have risen sharply lately, fund flows into bonds tell two very different stories. We have previously written much on the recent rise in bond yields related to economic growth, event risks, and recessions. To wit:

“Since rates and expectations must adjust for the potential future impact on the current value of invested capital:

  • Equity investors expect that as economic growth and inflationary pressures increase, the value of invested capital will increase to compensate for higher costs.
  • Bond investors have a fixed rate of return. Therefore, the fixed return rate is tied to forward expectations. Otherwise, capital is damaged due to inflation and lost opportunity costs.

Therefore, the long-term correlation between rates, inflation, and economic growth is unsurprising.

That chart is pretty cluttered, so the following chart is a composite index of inflation and economic growth compared to the 10-year Treasury yield.”

Of course, that analysis contradicts the views of Ray Dalio, Bill Ackman, Bill Gross, and others who currently expect rates to go higher. The disconnect comes down to time frames. More importantly, investors must understand the difference between short-term market-driven narratives and the long-term economic dynamics that drive interest rates.

Such is the basis for our discussion in this blog.