What has been happening with fixed income investing now that the Fed is ready to raise rates and inflation as continued to move higher? As expected there has been a flight out of nominal assets that cannot adjust to higher inflation and will decline in value with rate increases. Since the beginning of the year, billions have flowed out of LQD (the investment grade benchmark), HYG (the high yield benchmark), and EMB (the EM bond benchmark). The outflows have been a significant percentage of assets under management. Trading volume is higher and put option volume has also increased.
The somewhat odd investor behavior is that equity inflows have moved above trend while the cumulative bond flow peaked earlier in January. The Fed may be increasing discount rates, but investors believe that earnings may increase and or corporations will be able to control product prices in the face of inflation.
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