NEW YORK -- Even as stocks reach new all-time highs, investors continue to pour into bonds.
Some on Wall Street have speculated investors would embark upon a "great rotation," pulling their money out of bonds and putting them into stocks as interest rates rise and the economy improves.
Rick Rieder, chief investment officer of fixed-income at investment giant BlackRock Inc., believes investors will instead draw from their "tremendous amount" of sidelined cash to invest in stocks.
“It won’t come out of fixed-income,” Rieder said.
Investors have been growing more optimistic as economy shows more stability and the threat of financial shock fades, Rieder said.
“People feel more comfortable every day to take a bit of risk,” Rieder said.
A stock-market rally this year has pushed the Dow Jones industrial average to new record highs, as the broader Standard & Poor's 500 index flirts with a new all-time high. Investors have been returning to stocks following five years of pulling out of the stock market.
But they are also continuing to pour into bonds, according to data from the Investment Company Institute.
Investors put $32.8 billion into bond mutual funds in January, compared to $37.9 billion into stock funds that month, ICI data show.
In the week ending March 6, investors put $6.4 billion into bond funds, more than double the $2.9 billion they put into stock funds the same week, ICI data show.
Demand for fixed-income investments remains strong, and is only likely to grow in coming decades as the world's population ages and the working-age population decreases, Rieder said. Much of the demand will come from insurance companies and pension funds, he noted.
The problem, though, is that the Federal Reserve and other central banks around the world have pushed interest rates to historic lows in unprecedented attempts to prop up the global economy by flooding it with easy money.
“We are in a historic time,” Rieder said in an interview. “Fixed-income used to be a stable, low-risk asset class." Now, with bond prices rising and yields at historic lows, he added: "The risk has picked up significantly.”
As interest rates drift higher, investors needing income from their portfolios will need search outside of traditional fixed-income investments, such as Treasury bonds and top-notch corporate bonds, he said.
Investors will have to seek out other types of fixed-income investments, such as bank loans, which are similar to high-yield corporate bonds, and asset-backed securities, Rieder said.
Continued demand for yield from fixed-income will give rise to bonds with floating interest rates, he said. Investors will have to diversify aggressively to mitigate the risk of rising interest rates.