The Surging Inflows to Bonds and the Factors Helping to Sustain It



In the past year, there has been a worldwide surge in demand for United States debt, coming from baby boomers, pension funds, and investors in Europe and Japan. These investors have been buying long-term treasuries that have created a rise in bond prices and have lowered their yields. If this trend continues, which most economists say it will, then this could decrease the level of treasury yields that influence borrowing costs for government bonds, home mortgages, and credit cards.

The trend for loading up on bonds, rather than equities, will continue because most elder investors will start to become more concerned about avoiding losses in equities which have suffered in recent years. This concern was driven due to the fact that too much money was being placed into unstable equities that had lost money. According to the U.S. Census Bureau, U.S. households between 1992 and 2001 reduced their bond holdings to a measly 4.6 percent from 8.4 percent. During the same period, U.S. households increased their portion of savings into equities from 16.5 percent to 21.6 percent.

To avoid the losses of the equity markets, a wave toward distribution of one's portfolio has now started to take place. Fixed income, corporate and municipal bonds, as well as treasury bonds have become the staple for retirement accounts for many individuals. Helping the cause is President George Bush's proposals fortify assets of private pension plans. Because there have been instances where these private pension plans have been under funded, the new rules call for more stringent plans that ensure long-term obligations for retirees. It is estimated that there are about $1.8 trillion in these current plans. Therefore, if a shift into equities from bonds takes place, a major flow of billions of dollars could be changing hands.

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The Surging Inflows to Bonds and the Factors Helping to Sustain It