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Money is filling up fixed-income coffers, and Icahn's in CIT's catbird seat.
Forbes.com - Oct. 30, 2009 - by Matthew Craft
Every single week this year, investors have added their savings into U.S. bond funds buying U.S. Treasury securities and investment-grade corporate debt, according to fund tracker EPFR Global. They dropped in another $2.7 billion in the seven days to Oct. 28, up from $2.6 billion the previous week.
U.S. equity funds, however, lost another $5 billion in cash, bringing the year to date outflow to $56 billion.
Bond funds' popularity seems to be coming at the expense of low-paying money market funds and more volatile stocks. It has also allowed companies to borrow at cheaper rates and played a bit part in foiling dire predictions that the U.S. government would struggle to sell trillions in notes to finance deficit spending this year – a benefit, perhaps, of people following the herd.
"Fixed income was a wonderful performer last year, so people continue throwing money at it, oddly, even though interest rates are bound to rise" said Brad Durham, EPFR managing director. "In their defense, they are moving money mainly out of cash, so at least they're getting something out of it."
Return chasing – akin to playing a hot hand – is one way to explain the seemingly insatiable desire for debt. Others say investors aren't keen on stocks because they either were burned badly last year or doubt the economy will recover soon so see little reason to have faith in stronger company earnings or the recent 3.5% rise at an annualized rate in gross domestic product.
The U.S. government sold a record $123 billion in notes this week and investors and foreign central banks wanted much more. Bids totaled $372 billion. The flood of supply has yet to diminish demand. In a note to clients on Friday, David Rosenberg, chief economist at Gluskin Sheff, wondered if we were witnessing French economist Jean-Baptiste Say's idea that total demand and total supply balance. In other words, is supply creating its own demand?
The federal government's guarantee of bank debt was credited with luring buyers into corporate bond markets earlier this year. The chance for financial firms to take advantage of the Federal Deposit Insurance Corp.'s guarantee ends on Oct. 31. Data from Dealogic shows Citigroup ( C - news - people ), GMAC ( GJM - news - people ) and credit union Wescorp raised a total of $9.4 billion through this Temporary Liquidity Guarantee Program in October.
Corporations that lined up high-yield sales this week include Reynolds Group, which issued $1.1 billion, and Berry Plastics, which issued $599 million in two types of bonds.
On Friday afternoon, the commercial lender CIT Group ( CIT - news - people ) said that it had received a $1 billion line of credit from Carl Icahn, a day after a deadline expired for bondholders to swap their debt for new notes at a discount. CIT hopes to shed at least $5.7 billion through the debt exchange. If it fails, the lender said it would likely file for bankruptcy.
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