U.S. bond funds suffered their second-worst withdrawals last week in more than two decades after speculation about an eventual end to the Federal Reserve’s bond purchases sent fixed-income markets lower.
Investors pulled $9.1 billion from fixed-income mutual funds and exchange-traded funds in the week ended June 5, Denver-based Lipper said yesterday in an e-mailed statement. That’s the second-biggest redemption for a week since the company started tracking the data in 1992. Corporate high-yield funds saw redemptions of $3.2 billion, Lipper said, the largest weekly withdrawal on record.
While retail investors have favored the perceived safety of bond funds over equity funds since the financial crisis, money managers and analysts have been predicting a reversal as interest rates near zero would eventually rise and send bond prices lower. Global bond markets posted their biggest monthly losses in nine years in May, as the more than $40 trillion of bonds in the Bank of America Merrill Lynch Global Broad Market Index fell 1.5 percent on average.
Lipper didn’t break down the bond-fund redemptions into mutual funds and ETFs. Individual investors typically own bonds through mutual funds, while institutions are big buyers of ETFs.
Bill Gross’s Pimco Total Return Fund (PTTRX:US), the world’s largest mutual fund, had redemptions of $1.32 billion in May, the first net withdrawals since 2011, according to Chicago-based Morningstar Inc. The $4.9 billion ETF version (BOND:US) of the fund had $64.4 million in withdrawals in May and another $119 million in the first five days of June, according to IndexUniverse, a San Francisco-based research firm.
Gross, co-chief investment officer of Pacific Investment Management Co. in Newport Beach, California, last month predicted that the three-decade bull market in bonds had ended in late April. He said yesterday that he’s sticking to high-quality bonds as market risks are rising.
“Treasuries in the last few weeks have certainly been the place to be,” Gross said during an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Sara Eisen. Stocks, high-yield debt, currency and emerging-market bonds are all in “disarray,” he said.
Federal Reserve Chairman Ben S. Bernanke told Congress on May 22 that the central bank’s policy-setting board could start scaling back its bond purchases in its “next few meetings” if the U.S. employment outlook shows sustained improvement.
Economists polled by Bloomberg this week predicted the Fed will trim its quantitative easing program to $65 billion a month at the Oct. 29-30 meeting of the Federal Open Market Committee, from the current level of $85 billion.
In the most recent week, equity ETFs experienced $2.8 billion in redemptions, while stock mutual funds attracted $500 million, Lipper reported. In the first four months of the year, stock mutual funds gathered $92 billion as bond funds won $96 billion, according to data from Chicago-based Morningstar Inc. (MORN:US)
The flight from bond funds was a global phenomenon, affecting both retail and institutional investors, according to EPFR Global, a Cambridge, Massachusetts company that tracks the flow of money into traditional and alternative funds around the world.
Those bond funds saw redemptions of $12.5 billion in the week ended June 5, EPFR reported today, the biggest weekly withdrawals since the firm began collecting data in 2001.
Debate Over Rates
“Every year for the past four years, people have said the bond trade is over and yet it keeps going,” Lee Spelman, head of U.S. equity client portfolio managers at New York-based JP Morgan Asset Management, said in an interview last month.
Economists surveyed by Bloomberg expect U.S. rates to rise over the next four quarters.
Jeffrey Gundlach disagrees. The manager of the $41 billion DoubleLine Total Return Fund (DBLTX:US), said this week that while rates may move higher in the near-term, he expects the yield on the 10-year U.S. Treasury note to drop to 1.7 percent by the end of the year. It closed yesterday at 2.08 percent, according to data compiled by Bloomberg.
“It’s a horrible time to be exiting bonds,” Gundlach said.
One type of fixed-income investment that has remained popular is the adjustable-rate loan. Investors added $873 million in the week to funds that buy the loans, Lipper reported, the 51st straight week of deposits. Rates on the loans float higher as interest rates climb.
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