As the situation with the European periphery progresses the bull run in U.S. and Japanese government securities accelerates. The 10-year U.S. treasury note is at a record low yield of 1.45%. Japanese 10 years are trading at 0.816%. Investors are making decisions based on fear, which is driving these bond yields to previously unseen levels.
But as events progress one has to wonder just how far they can be pushed. The market action on June 1st in Gold looked to me like an inflection point in the markets, signaling the end of money flowing out of gold and into tier 1 assets such as cash and short-term securities. Since March 1st, which is where the last inflection point occurred, the SPDR Gold Trust ETF (GLD) saw its AUM drop by $1.156 billion, through May 31st. Conversely, PIMCO's Total Return ETF (BOND), which launched that day has seen $922 million in flow and had an AUM of $1.268 billion.
The PIMCO fund is primarily made up of Mortgage backed securities and U.S. government securities and has risen 5.2% since its inception. Those flows mirror what has been seen in the government bond rally. But that is not the only asset class that has been the recipient of investors' attention. High-grade corporate bonds have also seen a very significant influx of money.
Investment grade corporate paper can also be used for staying one step ahead of the banking regulators and as government bonds have surged in price dramatically, the yields on corporate bond ETFs have been rather muted, even though the size of the top 10 U.S. corporate bond funds by AUM has risen by 10.4% in the past three months. Nearly $4.2 billion in corporate paper has been purchased through these ETFs in that time. Moreover, it is the funds with the shortest maturity profile, 1 to 3 years, which have seen the highest percentage rise in their AUM.
The biggest fund iShares iBoxx Investment Grade Corporate Bond ETF (LQD) accounted for $1.736 billion of the total flow raising its AUM by 8.9% and has an average maturity age of 9.2 years. The SPDR Barclays Capital Short Term Corporate Bond (SCPB) saw its AUM surpass the $1 billion mark in late May. The fund has grown by 72.6% since March 1st.
The massive rally in gold on June 1st signals a potential change in monetary policy by the Federal Reserve, which we will not be able to quantify until the statistics are published in two weeks. But, what has not changed is the rally into bonds. Gold joined the party as GLD began seeing flow on May 23rd, seven trading days before the technical breakout, but the banks' preparations for all possible scenarios in Europe with respect to Greece have not stopped.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.