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Fund Spy

Bond Funds Cut the Cord

How risky are these moves? Are they here to stay?

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The bond market's getting even more popular. Despite a gut-wrenching sell-off from late 2010 through January of this year, flows into bond funds have been massive. Taxable-bond funds took in more than $92 billion during the first half of 2011 alone according to Morningstar estimates. And even though municipal-fund flows were net negative by roughly $22 billion for the same period, both groups are still way in the black since December 2008, several months before the financial crisis began to ease.

In short, investors are pouring into bonds on an unprecedented scale. With more than $685 billion of inflows to bond funds since December 2008, we have not been able to find another period that comes close, even when adjusted for inflation.

A Brave New World?
If history is any guide, a lot of investors may not know exactly what they're getting into. In fact, there are notable differences in the way those dollars are being put to work today relative to how things were done in the precrisis era.

Eric Jacobson has a position in the following securities mentioned above: PTTRX. Find out about Morningstar’s editorial policies.