Investors returned to US long-term bond funds in May

U.S. long-term bond funds drew massive inflows in May, reversing April’s drawdown and indicating investors sought the safety of higher-yielding debt, as they weighed a host of uncertainties around trade tariffs, inflation and fiscal deficits.

According to Morningstar data, U.S. long-term bond funds attracted $7.4 billion in May, their largest monthly inflow in over two years, after facing sharp outflows in April.

Jeana Doubell, fixed income analyst at Morningstar, said inflows into long-term bond funds in May reflect investor expectations of weaker growth and a view that bonds offered better value than other riskier assets.

U.S. long-term bonds were sold off heavily in April on concerns that U.S. tariff measures could fuel inflation, while expectations that President Donald Trump’s tax bill could inflate the deficit and Treasury supply added to the pressure.

However, analysts said those concerns have eased as trade talks progress, rekindling appetite for long-term bonds.

“Long-bond prices are susceptible to inflation, and recent data shows very little inflation above the Fed’s 2% target,” said Chris Gunster, head of fixed income at Fidelis Capital Partners. “As long as inflation is less of a concern, then long-dated Treasuries should reassert themselves as a hedge against equities and other risk asset declines.”

“The smart investors should already be locking in longer-term rates,” he said.

The Morningstar data showed short-term bond funds saw $5.8 billion in outflows after strong inflows the previous month, while intermediate-term bond funds attracted $4.2 billion.

iShares 20+ Year Treasury Bond ETF led with inflows of $4.3 billion, while iShares 10-20 Year Treasury Bond ETF and iShares 7-10 Year Treasury Bond ETF received $1.2 billion and $625 million, respectively.

U.S. stocks took a breather on Wednesday, pausing a two-day rally as the tenuous Israel-Iran cease fire continued to hold and investors pored over a second day of congressional testimony from Federal Reserve Chair Jerome Powell.

Tech shares lifted the Nasdaq, while the S&P 500 ended flat. The benchmark index remained within striking distance of its record closing high reached on February 19.

The blue-chip Dow ended in negative territory.

“It almost feels like back to your regularly scheduled bull market,” said Ryan Detrick, chief market strategist at Carson Group in Omaha. “We’ve dealt with the tariffs, we’ve dealt with the Middle East drama, but stocks continue to defy the odds by moving higher with the realization that the U.S. economy remains quite resilient.”

“But today it’s almost like watching paint dry as we’re all waiting for the S&P 500 to make new highs,” Detrick added.

Nvidia shares touched a record high, lifting its market value to $3.75 trillion and making it the world’s most valuable company.

Among the 11 major sectors of the S&P 500, technology, communication services, and healthcare advanced on the day. Defensives such as real estate, consumer staples and utilities underperformed the broader market.

“The lifeblood of a bull market is rotation,” Detrick said. “And to see technology and communication services taking back the baton is really a good sign that this surprise summer rally likely has legs.”

The Dow Jones Industrial Average fell 106.59 points, or 0.25%, to 42,982.43, the S&P 500 lost 0.02 points, or 0.00%, to 6,092.16 and the Nasdaq Composite gained 61.02 points, or 0.31%, to 19,973.55.

The fragile truce between Israel and Iran continued to hold, with U.S. President Donald Trump declaring victory despite a lack of clarity regarding the extent of the damage U.S. strikes had on Iran’s uranium enrichment assets.

Fed Chair Jerome Powell, in his second straight day of congressional testimony, reiterated to the Senate Banking Committee that the central bank is well-positioned to wait to cut interest rates until the inflationary effects of Trump’s wide-ranging tariffs are better known.

Financial markets are pricing in almost a 25% likelihood of a rate cut at the July policy meeting, and a 67% probability that the first cut will arrive in September, according to CME’s FedWatch tool.

Housing data on Wednesday showed new home sales plunged 13.7% and applications for loans to buy homes dipped as mortgage rates edged higher.