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U.S. Retail Investors Prefer Corporate Bonds To Equity

ByThe National Bank of Canada
Published 08/15/2012, 04:30 AM
Updated 05/14/2017, 06:45 AM

U.S. equity markets have done well in recent weeks but this performance notwithstanding, retail investors remain wary of adding to their positions. According to preliminary data published by the Investment Company Institute (ICI), mutual funds that invest primarily in U.S. equities recorded net outflows for a record 15th consecutive month in July. As today’s Hot Chart shows, the cumulative outflow over the period stands at $207 billion for equities. Bond funds, for their part recorded inflows of $261 billion over the same period. Within bond funds, there is a clear preference for corporate paper as opposed to low-yielding government securities. We believe that this dynamic is here to stay. With a record 21% of the U.S. workforce now aged over 55 (a share that is still rising) and 36% of households’ total financial assets earmarked for retirement, the asset mix of the general population is structurally biased towards instruments that generate an income stream. As shown, this development also argues for the persistence of a large equity risk premium (as measured by the differential between the earnings yield and corporate bond yields).
Retail Investors Prefer Corporate Bonds To Equity

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