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April 15, 2020, 4:55 p.m. EDT

Mom and Pop sold bonds as the market tanked

Advisers suspect it was a ‘dash for cash’

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By Brett Arends, MarketWatch


Photo by JOHANNES EISELE/AFP via Getty Images
In last month's historic plunge, investors sold whatever they could

Individual investors stampeded for the market exits during last month’s meltdown.

But this time it wasn’t just the stock market they were fleeing, but the bond market too.

Mutual-fund investors sold an astonishing $295 billion worth of bond funds in their 401(k)s, IRAs and other investment accounts during the five weeks between Feb. 26 and April 8, new industry data reveal.

That included money from safe Treasury and municipal bond funds, and investment grade corporate bonds, not merely from higher-risk “high yield” or “junk” bonds.

Meanwhile sales of stock mutual funds doubled the average rate from the preceding 12 months—showing that some mutual-fund investors sold when prices were falling.

The data, from the Investment Company Institute, a trade association for the mutual-fund industry, cover both exchange-traded funds and traditional old-fashioned mutual funds, which investors buy and sell from a broker or direct from the fund company.

Fund giant Vanguard reports that most of its customers held their nerve during the crash. About 89% of individual investors stuck to their portfolio allocation, and around 70% actually bought stock during the selloff, the company said. It also said investors had withdrawn $63.6 billion from bond funds this year, through the end of March, while investing a net $36.5 billion in stock funds and moving $29.7 billion into money-market funds.

Read: 401(k) investors may be tougher than you think

Financial advisers say overall selling of bond funds last month was a dash for cash.

“We believe this selling was almost entirely about panicked investors trying to access liquidity in any way possible, and not about a shift in the fundamental outlook for bond markets,” says Daniel Trumbower, a financial adviser at Halpen Financial in Rockville, Md.

“It was a flight to cash,” says Kenneth Nutall, a financial planner at BlackDiamond Wealth in Wilmington, Del. “People were selling whatever they could sell and were selling whatever was liquid.”

ICI data suggest that investment grade corporate bond funds may have accounted for nearly half of the total, followed by municipals, global bonds and Treasurys.

Investors may be wiser than they realize. The rush to sell bonds came as the federal government unleashed spending on a scale never before seen or even imagined. That includes at least $2 trillion in federal bailout money for corporations, small businesses and individuals, and $2.3 trillion in new Federal Reserve money printing.

Read: COVID-19 crisis creates a perfect opportunity for Roth IRA conversions

A trillion here and a trillion there, as the saying goes, and pretty soon you’re starting to talk about real money. The bailouts are equivalent to about 20% of annual U.S. GDP.

The United States national debt, which was just 30% of annual gross domestic product in the 1970s, surpassed 100% in the fourth quarter of last year. That was before the crisis.

This might prove perilous for bonds. Such so-called fixed income products — Treasury, municipal and corporate bonds — pay regular income every year. That makes them a good investment to have in a slump, when regular payments become harder to find. But it makes them a poor investment if there is inflation, because prices rise but the coupons, or income, don’t.

Many Wall Street strategists feared inflation the last time the federal government and Federal Reserve stepped in with open checkbooks, in 2008-9. The fears proved unfounded. But that doesn’t mean they must do so again.

Bond prices today don’t offer much of a cushion if inflation were to emerge. Anyone buying a 10-year Treasury note today is locking in an interest rate of 0.76% a year until 2030. Corporate bonds offer more, but not much.

This may be a reason inflation-protected Treasury bonds, known as TIPS /zigman2/quotes/204162186/realtime VAIPX -0.37% , have jumped sharply in price. They are now so expensive investors are locking in yields that are guaranteed to be below inflation—in other words, to lose purchasing power—all the way up to 30 years.

It may also be a reason that the price of gold /zigman2/quotes/200593176/composite GLD -1.73% , a traditional safe haven from inflation, is up nearly 20% so far this year.

The panicked sale of bonds as well as stocks is yet another sign of just how historic last month’s coronavirus crash really was. In a regular correction or bear market, retail investors typically cash in stocks but hold close to their bonds, which are seen as a safe haven and usually go up in value.

It isn’t often the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -1.62%  loses a third of its value in less than a month.

But in a total liquidation panic, it’s like the old TV commercials. Everything must go.

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Brett Arends is a MarketWatch personal finance writer. Follow him on Twitter @BrettArends.

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