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Toning down the risk

Data from Investment Metrics show that institutional investors moved assets out of equities and into fixed income during the first half of 2018. Some $93 billion came out of U.S. equity strategies through June 30, with another $71 billion coming out of non-U.S. strategies. Of those totals, $57 billion and $50 billion were redeemed by tax-exempt investors, respectively. Conversely, $113 billion went into U.S. fixed-income strategies ($104 billion from tax-exempt investors), and a smaller $16 billion, all from tax-exempt investors, flowed into non-U.S. fixed income.

Through June 30, U.S. equities, measured by the Russell 1000 index, returned 2.85% (facilitated by a 3.57% second quarter return), while international equities fell 3.77%. What makes the money flowing to fixed-income assets notable is that it is happening in a rising rate environment. The 10-year Treasury yields have flirted with 3% and above for the first time in five years, and corporate yields rose 70 basis points since the beginning of the year. Through June 30 the Bloomberg Barclays Aggregate bond index fell 1.6%. This suggests these asset flows are a fundamental change in investor sentiment and that risk is being taken off the table on a broad scale.