Investors sell corporate and household bonds. What they buy.

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The money was withdrawn from corporate and household bonds. And what investors buy may seem counterintuitive in these times of war and inflation: they are losing stocks.

About $ 20 billion was moved last week from both investment grade and high-yield bonds, which cover corporate and household debt, according to Bank of America data. Last month, the average weekly outflow was $ 15 billion.

On the other hand, $ 25 billion in stocks last week. Now, that’s a lot of cash but a lot less than last year. At that time last year, $ 347 billion in shares had gone up. The year-to-date number of 2022 is $ 180 billion.

So what’s going on? Equities are considered riskier or more risky, as are investment grade and high yield bonds, but investors still invest their money in stocks. They seem more willing to put their necks to the line for higher returns on stocks, but not bonds.

Let’s break down what lies behind all this.

The big driver of the credit exit is the Federal Reserve, which expects to lift the benchmark loan rate seven times this year. These increases will translate into higher interest rates on safe treasury bonds.

This is where it gets a little complicated to understand. The higher interest rates on government bonds push up payments on credit, or corporate and government bonds. Investors demand the higher returns as compensation for the additional risk.

Now, investment rates in high-yield bonds are becoming more risky than treasuries, because households and businesses can be standard currency, and the government will not – or at least the chances are very slim that it will not.

Stop, though. The higher interest rates on government bonds are not the only thing that puts pressure on payouts. So inflation is out, which is what the Fed is aiming to do with its rate hikes – by significantly combating economic demand.

An extension can, and often does, translate into lower-than-expected corporate profits and lower household incomes through company-induced layoffs – and then Americans and companies have a higher risk of default. Already, the share price of iShares iBoxx $ High Yield Corporate Bond Exchange-Traded Fund (HYG) has fallen 0.8% in the last month and 6% year to date.

At this point, it makes sense for investors to get out of risky bonds. So it makes sense that they also come out of stocks.

But the numbers show that investors are not afraid of stocks running. To understand why, we need to look at both stocks and corporate bonds on a timeline: Companies are theoretically expected to increase their earnings stream year on year, and the dollars are owned by stockholders so that stock prices can move higher.

For corporate bonds, the income is fixed to the debt investor; Interest payments, generally speaking, do not change and expire on a certain date, which means that bond prices can only go so high before there is no return. So when interest rates rise enough, corporate bond prices usually fall.

For all that, the thing is to remember that investors put less of their money in the hands of Wall Street than they did last year: again, almost half as much. The decline should come as no surprise, as the expectation at this time last year was that societal gains and economic activity would explode on the back of trillions of dollars of fiscal stimulus and pandemic reopening.

The point is that now investors have much less appetite for risky assets – corporate bonds and equities, but especially bonds.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com