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July 27, 2020 at 10:25 AM
Bank of America Global Research reported Friday that weekly flows to cash hit their highest level since May 6, $40.9 billion. Inflows to bonds were the third largest ever at $24.5 billion; and gold took in $3.8 billion, its second largest inflow. Equities had redemptions of $3.8 billion, or 0.6% of total assets.
Fixed income, in particular, sparkled, as investment-grade bonds enjoyed their third best week with $14.5 billion of inflows. Munis, too, celebrated with their fourth biggest inflow ever, $1.9 billion.
The report noted that investors have sold stocks over the past 12 months, and the trend needs to reverse if global stocks are to reach new highs versus global bonds.
BofA’s report lays out two themes that dominate investors’ thinking this summer.
‘Great Repression’
One theme is what BofA calls the Great Repression, whereby $8 trillion of monetary stimulus via central bank asset purchases has stomped on interest rates, corporate bond spreads, volatility and bears.
The report cites the U.S. fiscal deficit, which rose from 7% to 40% of GDP in the second quarter, causing volatility in the U.S. Treasury market to decline to a record low.
Examples of “repression” yields include Italian and Greek 10-year government bonds, down to 1%; U.S. commercial mortgage-backed securities and investment-grade corporate bonds at 2%, and U.S. 30-year mortgage rates, at an all-time low of 3%.
The U.S. Federal Reserve has made bulls a winner in every asset class, the report notes, as gold, bonds, credit, stocks and real estate are all well up from March lows.
Moreover, the levered cross-asset risk parity strategy — allocated across global equities, Treasuries, commodities and Treasury inflation-protected securities (TIPS) — has hit an all-time high.
According to the report, an “all-weather” portfolio comprising an allocation of 25% each in stocks, bonds, cash and gold was up by 18% over the past 90 days, compared with a historic annual average gain of 7%.
Now, second-quarter bearish narratives for financial markets — BofA cites the end of globalization, Democratic election sweeps, Japanification of economies (referring to deflation and anemic growth) and narrow leadership of some growth stocks benefitting from lockdowns — are transforming into bullish narratives.
