Risk assets surge in lead-up to Fed decision - EPFR

NEW YORK, Sept 14 (Reuters) - Investors worldwide jumped into stocks and riskier assets in advance of the Federal Reserve's decision on Thursday to give the U.S. economy a jolt with a new round of bond purchases, according to the latest data from EPFR Global.

Equity funds worldwide raked in $12.1 billion in investor money in the week to Sept. 12, the most new money taken in by stock funds in 65 weeks, the fund-tracking firm said on Friday.

U.S. equity funds accounted for $9.25 billion of the past week's inflows. But even European equity funds gained favor and took in $934 million in new money. In the prior week, investors had taken money out of European stock funds.

The past week's rally in stock funds could be the start of a trend as the Fed's decision to buy $40 billion in mortgage-backed securities each month may drive yield-hungry investors into riskier assets. The Fed hopes its latest quantitative easing program, dubbed QE3, will push mortgage rates even lower in a bid to spark a revival in housing and job creation.

"The QE3 was much more than most market players were expecting," said Margaret Patel, senior portfolio manager at Wells Capital Management. "I think you are getting nearer and nearer to the inflection point where, especially in the U.S., you'll start to see net inflows into equities."

The benchmark S&P 500 rose 2.36 percent over the reporting period, which ended Wednesday. On Thursday, the day of the Fed announcement, the S&P surged 1.63 percent and the rally in U.S. stocks continued on Friday with the S&P rising another 0.23 percent.

While many had been anticipating Fed action to juice the economy, the scope of its move surprised some. Not only did Fed Chairman Ben Bernanke announce the U.S. central bank would buy mortgage-backed securities until the job market showed clear signs of recovery, he also said the Fed did not plan to raise interest rates before the middle of 2015.

The Fed move, however, has drawn criticism from some on Wall Street who worry the decision to buy mortgage securities could be inflationary and cause commodity prices to rise.

The yield on the benchmark 10-year Treasury note rose to 1.87 percent on Friday, its highest in several weeks.

The surge in stocks during the period captured by EPFR also coincided with the European Central Bank's announcement that it too would buy government debt in a bid to boost the failing economies of several euro zone nations.

But it wasn't just stocks that gained favor over the week.

High-yield "junk" bond funds attracted $1.95 billion in investor money, the most in seven weeks. Patel said she expects junk bond funds to perform well the rest of the year in light of the Fed's action.

In anticipation of the Fed's move to push down mortgage rates and bond yields, investors pulled $254 million out of safe-haven U.S. government bond funds.

In the coming weeks, analysts said they expect investors to pull more money out of bond funds as they rotate into stocks. Jon Ruff, lead portfolio manager and director of research for AllianceBernstein's real asset strategies, said Fed easing will force investors into riskier assets.

EMERGING MARKET BONDS, COMMODITIES FUNDS GAIN

Expectations of more stimulus from the Fed also helped pull $1.63 billion into emerging market bond funds, which investors seek for yield and growth potential.

The inflow into emerging market bond funds is the highest in 31 weeks, EPFR Global said.

Funds that target commodities gained $1.77 billion in new money, the most in 32 weeks according to the fund tracker, with gold and precious metals funds accounting for $924 million of the inflows.

Gold funds were bound to do well given the expectations for more stimulus from the Fed, which debases the U.S. dollar, said Ruff.