While Wall St. Talks of Recession, Bond Investors Make a Killing

on Aug28
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For stock investors, the trade war has been nothing but trouble. For bond investors, it’s been a dream.

Unable to stomach turbulence driven by the escalating conflict between China and the United States, and leery of a darkening outlook for the economy, investors have been pulling money out of the stock market and buying bonds, the traditional place to park cash during times of uncertainty.

The rush has turned parts of the ordinarily boring bond market into a better bet than stocks. The gains are unusual; by some measures, bonds are having their best year since 2002. And they do carry risks for investors who are buying now. If the concerns that have lured investors into the bond market dissipate — because Washington and Beijing reach a trade deal, for example — then bond prices could start to fall.

When investors expect the economy to grow, they typically turn to investments like stocks that might rise fast as company profits increase.

But lately, the S&P 500 has been on a jagged path as bad news on the global economy, or sudden threats and escalations by President Trump or the Chinese government, have unsettled investors. The upshot of these swings is that, even with a decent gain this year, the stock benchmark is roughly unchanged from where it was in early 2018.

“For a lot of clients, they feel like they’ve just been bouncing up and down, and stocks are not going much of anywhere,” said Michael Ball, president of Weatherstone Capital Management, an asset manager based in Denver. “That gets people on edge.”

For investors weary of such volatility, bonds have become a go to alternative.

Bond prices do not fluctuate as much as stocks, and the returns they offer are typically more certain than those of many other investments. On top of the interest payments companies are obligated to make, the price of the bond itself can rise — as they have this year — generating an investment gain for bondholders.

So, as investors sold almost $70 billion of stock investments like mutual funds and exchange-traded funds in the year through July, according to data from EPFR, nearly $260 billion of cash flooded into vehicles that invest in the American bond market. Interest rates in places like Europe and Japan are even lower than they are in the United States, making bonds in the United States appealing to global investors as well.

One of the broadest gauges of the American bond market, the Bloomberg Barclays Aggregate index — the S&P 500 of the American bond market — is sitting on gains of more than 9 percent, including both interest payments and price appreciation. If it were to finish the year at that level, it would be the index’s biggest increase since 2002.

Mr. Alexander was not expecting big returns from the bonds. After an ugly sell-off in the stock market, he figured that he could collect an advertised 3.5 percent annual yield on the bond fund while he waited for the uncertainty to clear. Instead, the bond fund rocketed higher.

It’s up more than 20 percent this year, handily outpacing the nearly 16 percent gain for stocks, including dividends.

“It’s crazy,” said Mr. Alexander, who lives outside Houston. “It’s acting like a stock fund.”

Investors like Mr. Alexander, who are now sitting on a pile of unexpected gains, face a tough choice: lock in those profits or bet on the gains to continue as other investor follow them into bonds.

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