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Americans keep flocking to bonds in 2010, after record purchases in '09

January 29, 2010 |  7:00 am

Individual investors’ appetite for bond mutual funds waned somewhat in December, but the funds still set an astounding record for net cash inflows for the full year. And the buying trend has picked up again in 2010.

Investors pumped a net $375 billion into bond funds in 2009, nearly 14 times the inflow of 2008 and more than twice the previous record of $140 billion in 2002, according to the Investment Company Institute, the fund industry’s trade group.

In December alone bond funds took in a net $26.1 billion, down from $36.2 billion in November. But cash inflows have ramped back up this month, to a weekly average of $7.4 billion from $6.5 billion in December.

Bond funds ended last year with assets of $2.2 trillion. That covers all 1,850 open-ended mutual funds that invest in U.S. government, corporate, foreign, mortgage or municipal (tax-free) fixed-income securities.

Fi-bond-funds Bond funds still hold far less than stock funds, which ended the year with nearly $5 trillion in assets. Money market funds, with $3.3 trillion in assets, also hold more than bond funds.

But investors, on balance, pulled cash out of domestic stock funds and money market funds for much of last year. Bonds are what Americans wanted.

On a risk scale, bonds are sort of a halfway house -- between money funds and stock funds -- for many investors: You can lose money in bond funds if market interest rates rise (devaluing older bonds that pay lower fixed rates) but for the most part high-quality bonds can’t crash over short time periods the way stocks can.

And after 2008, many investors decided they couldn’t afford another crash. So, bonds became the logical alternative.

If market interest rates rise significantly this year, and bond fund share prices decline, the nation’s new love affair with bonds could hit the rocks.

Historically, whenever small investors rush into a particular investment Wall Street likes to assume that they’re too late.

But that isn’t always true. For example, individual investors became big buyers of foreign-stock mutual funds in 2004, and that turned out to be a savvy move: Foreign funds on average outperformed domestic stock funds every year through 2007.

So far in 2010, with stocks selling off and market interest rates either up modestly or flat, bond funds generally are beating stock funds -- which may just encourage more investors to tilt toward bonds.

The Pimco Total Return bond fund, the world’s largest, is up 1.5% this year, compared with a loss of 2.6% for the Vanguard 500 Index stock fund. Both of those figures are “total returns,” meaning the net change in principal value plus any interest or dividend income earned.

-- Tom Petruno