Charting Investment Flows

The Federal Reserve is suggesting that barring a deterioration of economic activity in the coming months, it is preparing a protracted exit to the extraordinary monetary policy pursued since the credit cycle ended. Talking about it is part of the Fed's forward guidance and is also part of the exit strategy. Investors, both retail and institutional, are adjusting their positions accordingly.

This Great Graphic was published on FT Alphaville, which in turn got them from Credit Suisse. The first chart below tracks the flow of funds into three broad categories of mutual funds. The dark red bar is the flows into, and now out, of bond funds. The dark blue bar are the flows into/out of US equity funds. The light blue, (look closely) track the global equity funds. Roughly $60 bln has left the fixed income funds, apparently the most on record.

This has been represented in the popular and business press, but the second chart puts it in a larger context of the stock of investments that have accumulated in various investment vehicles since the late 1990s. For example, the green line, which tracks flows into bond mutual funds, shows that the stock of such investment is near $3.5 trillion. On the eve of the Lehman debacle, there was around $1.7 trillion under management by fixed income mutual funds. There is no compelling reason to think that there is a mean reversion process at work and all the funds that flowed into the bond funds will now flow out.

In addition, the bond mutual funds capture mostly retail interest. Institutional investors have also been selling fixed income We noted that Japanese investors, for example, have been significant sellers of foreign bonds this year and in May appear to have sold about $30 bln of US Treasury bonds and notes. We also know that the Fed's custody holdings of Treasuries has fallen by about $26 bln from late May through early July.