CROSS-SECTORSECTOR COMMENT 17 AUGUST 2015ANALYST CONTACTSBenjamin S. Garber 212-553-4732 Asst Dir-Economist benjamin.garber@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterMoodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research, Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products. For further detail, please see the last page.Market CommentFlattening Yield Curve Can Hinder Bond Outflow Money has been flowing out of bond investment funds in recent weeks as the threat of higher policy rates makes debt less attractive. Yet this may not be the harbinger of the long anticipated great rotation of investment funds from bonds into stocks. On the contrary, limp inflation and a gradual pace of rate hikes may limit bond outflows. Additionally, subdued prospects for business sales growth will bolster demand for high grade credit at the expense of higher risk speculative grade debt and equities. So while investors will be hesitant to pick up bonds in the days ahead as the Fed looks to make its first move, any exodus from debt is likely to be limited in scale.MOODY'S ANALYTICS CROSS-SECTOR2 17 AUGUST 2015 MARKET COMMENT : FLATTENING YIELD CURVE CAN HINDER BOND OUTFLOWThe long stretch of bond fund inflows is facing challenges The recent past provided a preview of investors rejecting credit on a wide scale when tighter monetary policy became a possibility. Over a nine-month stretch beginning in June 2013, investors yanked $158 billion out of US-based bond mutual funds, according to the Investment Company Institute. These actions were prompted by the taper tantrum, when the potential end of quantitative easing sent the 10-year Treasury yield from a low 1.66% in May 2013 to 3.04% at the end of that year. But as US growth stumbled in early 2014 and the Fed was in no rush to lift rates, the great rotation started to work in reverse. Over the year ending this June, $38 billion in net new money flowed into bond mutual funds as $13 billion exited stock funds (Figure 1).Investors remain wary...
