BANK OF AMERICA: It's 'capitulation' in the bond market

Investors are shifting their money in the bond market as if we're in a recession.

Bank of America Merrill Lynch strategist Michael Hartnett said the seven days that ended Wednesday saw "huge" inflows of $5.1 billion into Treasury and government bond funds.

At the same time, funds were flowing out of the riskier high-yield market at a 12-month-high pace.

In fact, outflows from the high-yield market over the past seven weeks amount to about 5% of assets under management. That's "capitulation," according to Hartnett, who described the flows out of riskier assets and flows into lower-yielding government bonds as recessionary.

There were also "chunky outflows" from emerging-market debt, with $2.3 billion leaving the market, the largest outflow in 20 weeks. Money has left emerging-market debt funds in 23 of the past 26 weeks.

As the chart below shows, flows into yield investments are falling like dominoes. First there were outflows in emerging-market debt, and now the high-yield market has capitulated. At the moment, flows into real-estate investment trusts are resilient.

While the bond market is acting as if a recession is on the way, the equity market is not.

Selling in the equity market isn't close to the levels seen in junk bonds. Equity funds saw $3.5 billion in weekly outflows, taking outflows over the past three weeks to $24 billion, equivalent to just 0.3% of assets under management.

It's still well below levels in previous market panics. Hartnett said in a note earlier in the week that investors were not yet "max bearish," adding that investors were "stubbornly long tech, Eurozone & Japanese stocks," which are most vulnerable to a recession.

"Positioning jerkily, reluctantly adjusting to 2016 bear market & profit recession," the note said.