In a 9/22/09 FT article, Sam Jones compares hedge fund participation in the market for the past three years. In the fixed income sector, hedge funds that used to comprise almost a third of the trading volume are now only an eighth of the volume. So what is driving the huge inflow of money into bonds in the past few months? Money market rates that are close to zero. Many market funds that paid over 2% interest at the end of last year are paying about a tenth of 1%.

In a 9/19/09 WSJ article, Jason Zweig examines this flood of money out of money market funds and into bonds. He notes that “investors sank over $40B into bond funds in August, an all-time high for a single month, and are on pace to break that record again in September.” Zweig cautions investors not to chase yield by loading up on long term bonds, which will decline in price much faster than shorter term bonds when interest rates rise. Zweig briefly explains the concept of duration and how it affects bond prices and risk exposure.

At gurufocus.com, David Dietze compares money inflows into bond and stock funds this year with the bull market of 2003 – 2006. Since March of this year, $20 has been invested in bond funds for every dollar in equity funds. Dietze notes “More money has found its way into bond mutual funds this year than in the bull market from 2003 to 2006.”

Options to hedge against both inflation and rising interest rates include buying shorter term bonds, stocks that pay consistent dividends, and Treasury Inflation Protected bonds (TIPS).