Bond ETFs: Are Investors Liquidating or Rotating?

Back in the day when bonds acted as a safer haven, investors often rotated out of stocks and into bonds. Since the March lows, however, all assets have gone up together.

In fact, during the credit collapse, virtually everything went down together. Stocks, non-U.S. Treasury bonds, currencies, commodities, REITS, MLPs, preferred shares, precious metals – it really didn’t matter. Liquidity was king.

It stands to reason, then, if we really have entered some kind of “new normal,” investors won’t be content to park their profits/capital in the perceived safety of bonds. Instead, they would be running to cash.

Here is the performance of popular, non-U.S. Treasury bond ETFs since the S&P 500 hit an intra-day high on 10/21/09… 5 trading days ago:

Popular Bond ETFs 10/21 Close Through 10/28 Close
						% Change
iShares 1-3 Credit Bond Fund (CSJ)						0.23%
iShares Intermediate Credit Bond Fund (CIU)						0.28%
iShares Aggregate Credit Bond (CFT)						0.55%
iShares Investment Grade (LQD)						-0.20%

It seems to me that investors aren’t in a state of panic… like they were in September and October of 2008. At that time, investors liquidated iShares Investment Grade Bond (LQD), pushing the exchange-traded fund down -20% in a matter of weeks! Note: Approximately the same liquidation damage had been levied on iShares Intermediate Credit (CIU) last year as well.

In the current “bearishness,” where investors are taking profits and pulling back from risk, LQD has actually held its ground. CIU? Same story.

In all, this tells us that credit crisis fears have abated. It also tells us that we’re not seeing massive liquidation, but rather, a more typical rotation into less risky, investment grade bonds.

So before you give in to the notion that this pullback is the big bad bear’s return, recognize that pullbacks and corrections are supposed to occur. “New normal” or not, profit taking and asset class rotation should be expected.

When will big bad bearish realities return to the markets with ferocity? It’ll likely depend on the U.S. dollar; that is, hopelessly extreme devaluation would be catastrophic, while unanticipated extreme strength would result in carry-trade unwinding worldwide.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[mbkelly75:]

I like Bond ETFs for the Bond portion of my portfolio. I keep it at 34% and check to see if it needs re-balancing every two weeks. When the bonds go up - I sell enough to bring balance back. When the bonds go down - I buy enough to bring balance back. By treating the portfolio as one whole item instead of a bunch of different parts - I make money no matter which way the market moves.

Oct 29 11:59 AM

[Steve in TN:]

mbkelly75:
I like your strategy. I assume you buy and sell your equity portion the same way you handle bonds.

Oct 29 01:08 PM

[NEOCON47:]

???

what about international bonds with the slaughter of the usdollar?

Is there a short aginst it if the Holy dollar improves?

Oct 31 07:57 PM