Boomers lead movement into bonds

Investors could be setting themselves up for heartbreak though. John Lonski, a Moody’s economist, told the Journal that investors’ need to put cash in safe investments could force corporate bond risk premiums to artificially low levels.

“Investors seeking safety may mistakenly narrow spreads to such a degree that it encourages potentially disruptive risk-taking by corporate borrowers,” he said. “That could be a problem in five to 10 years.”

More evidence that boomers are favoring bonds the closer they get to retirement. The Wall Street Journal reports on large inflows into bonds, due in part to boomers weeding riskier investments out of their portfolios. Despite negative returns in 2006 and 2007, money continued to flow into bonds as older boomers started to pick up more conservative assets, Investment Company Institute data shows. The paper cites a survey from Fidelity Investments that says as of September 2009, 9.2 percent of boomers assets were in bond funds, up from 2.2 percent in 2000.

“Even in an environment where interest rates are rising and bond returns are hovering around zero, we can continue to see inflows into bond funds because of these demographic trends,” said Brian Reid, chief economist at ICI.

Boomers aren’t the only explanation for the boom in bond funds. Growth in target-date funds, and automatic enrollment for employer-sponsored retirement plans, not to mention investors of all stripes trying to get out of stocks and money market funds, have all contributed to the past year’s inflows, the Journal writes.

Investors could be setting themselves up for heartbreak though. John Lonski, a Moody’s economist, told the Journal that investors’ need to put cash in safe investments could force corporate bond risk premiums to artificially low levels.