Bond Purchases Pick Up, But May Not Last – Bank of America Merrill Lynch

There was a sudden uptick in bond purchases this week, coming in at the highest level in the past three months. Despite the surge, Bank of America Merrill Lynch believes the market could revert back to selling-off bonds soon. There was an inflow of $6.3 billion to bonds in the week leading up to Wednesday, despite the run occurring during the festive period. Even with a lower number of fund managers available, bonds sales were strong, surpassing the $5.5 billion spent on equity funds. Emerging market debt funds had an inflow of $1.9 billion, which was their first positive period in nine weeks. BAML investment strategy team warned against getting carried away with the current run. “A wobble in risk assets would be no surprise in the coming weeks, with traders looking to play a pullback,” the bank said in its note titled ‘Bonds are Back’.

The current uncertainty in the market concerning U.S president-elect Donald Trump might be a reason why investors are less bullish. Interest rates are also expected to rise in the coming weeks, prompting investors to get ahead of it. $3.6 billion was spent on investment-grade bond funds, while high-yield bond funds gained $900 million, making it six weeks in a row of solid sales. Bond sales are happening at a record pace so far, this year, and fixed-income businesses on Wall Street have benefitted strongly. “Expectations around fiscal spending and loan demand, lower taxes, and lighter touch regulation have coupled with actual fundamental improvement to drive the space,” said John Moran, an analyst with Macquarie. Trading revenues are expected to break a four-year slump for the five largest investment banks.