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Bond-fund correlations increase interest rate risk 

August 5, 2016

Jeff Benjamin, InvestmentNews

If the direction of asset flows out of stock funds and into bond funds this year is any kind of guide, investors are seeking shelter and yield in fixed income. But they could be getting neither.

Through the end of June, U.S. equity mutual funds experienced $56.2 billion worth of net outflows, while U.S. bond funds added $73.5 billion in net inflows.

The asset flows, based on Morningstar data, show a sharp swing from the full 12 months of last year when equity funds had $5.9 billion in net inflows, and bond funds had net outflows of $21.2 billion.

With the equity markets hovering around record highs, the direction of assets flows is understandable.

But what some financial advisers and investors might not be fully thinking through is how much risk they're actually taking on in the fixed-income side of the portfolio.

“The big challenge for advisers is to know what you're putting your clients into when it comes to bond funds, because you have to make sure you're overlapping credit risk with interest rate risk,” said Dan Heckman, senior fixed income strategist at U.S. Bank Wealth Management. Read more

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