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BMO Aggregate Bond ETF's total return for the 12 months to June 30 was just under 5 per cent.iStockphoto/Getty Images/iStockphoto

A bet on bonds right now is a wager on economic misery.

This warning is mandated by the huge inflows of money into bonds these days. Of the seven exchange-traded fund asset classes tracked by National Bank Financial, the one that attracted the largest inflow of money in the first half of the year was fixed income. Bond ETFs pulled in $4.6-billion from January through June, an increase of 14.7 per cent on a year-over-year basis.

The big winner in this trend was the BMO Aggregate Bond ETF (ZAG-T), which increased its assets under management by 109 per cent, NBF figures show.

This is performance-chasing at its finest. ZAG's total return for the 12 months to June 30 was a nick under 5 per cent, which is right in line with its two-, three- and five-year gains. That's impressive when you consider that bonds are supposed to be the safe part of your portfolio and the yield on five-year Government of Canada bonds is around 0.7 per cent.

Lingering economic weakness has driven bond prices higher, and this has generated the capital gains that are largely responsible for those impressive total returns from ZAG and peers (add yield plus changes in price to get total return). To get more of these gains from bonds, we'll need rates to fall further. That only happens if the economy doesn't rebound as expected from a dismal second quarter that reflected the impact of wildfires in Alberta on oil sands production.

BMO Nesbitt Burns looked at the second half of the year in a recent note to clients and cautiously summed up with a declaration: "The worst might be over for the Canadian economy, but that doesn't mean the best is yet to come." This outlook suggests maintaining an appropriate level of bond exposure for your age and risk tolerance, but not overdoing things.

It's amazing that this needs to be said at a time when yields are so low and stocks are humming. But those first-half fund flow numbers for ETFs suggest some investors are getting a bit carried away with bonds.

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