Investors pour cash into risky bonds despite stock rally - EPFR

NEW YORK Fri May 3, 2013 5:49pm EDT

NEW YORK May 3 (Reuters) - Investors worldwide continued to pour cash into bond funds in the latest week, with over $7 billion flowing into the funds despite the S&P 500 hitting record highs, data from EPFR Global showed on Friday.

The demand for bond funds in the week ended May 1 was more than triple the demand for stock funds at $2.24 billion, the fund-tracking firm said. It also showed strong momentum for bond funds after they took in $7.58 billion the prior week, which was the most in 23 weeks.

Investor appetite for riskier debt increased, with a record $3 billion flowing into funds that hold European bonds. Investors had anticipated that the European Central Bank would cut interest rates to stimulate the euro zone's indebted economy, which the bank did on May 2 by lowering its main rate to a record low of 0.50 percent.

"There is more confidence at this point," said Richard Sichel, who oversees $1.5 billion as chief investment officer of Philadelphia Trust Co, on the demand for European bonds. "There is more of a feeling these days that the weaker countries will get through it," he added.

High-yield "junk" bond funds also grabbed $2.2 billion in new cash from investors, the most in 31 weeks according to EPFR Global.

"It seems to indicate yield hunger," said Cameron Brandt, director of research at the fund-tracker. He added that the Federal Reserve and European Central Bank's stimulus measures are chasing money out of low-yielding vehicles without coaxing large sums of investor cash into stock funds.

The more than $7 billion into bond funds excludes $2.3 billion that was raised in the initial public offering of the DoubleLine Income Solutions Fund, which was the second largest sum ever raised in a closed-end bond fund offering. Including that amount, the $10.3 billion of new cash into bond funds over the week was a weekly record, EPFR Global said.

The inflows into bond funds came despite the benchmark S&P 500 U.S. stock index hitting record closing highs on April 29 and 30. Still, the index rose just 0.25 percent over the reporting period amid weaker-than-expected U.S. economic growth and a report that private employers added just 119,000 jobs in April.

Improved data on U.S. unemployment benefit claims at the April 25 start of the EPFR's reporting week and expectations that the U.S. Federal Reserve would keep its $85 billion bond-buying program unchanged at a two-day meeting boosted stocks over the period, however.

The Federal Reserve announced on Wednesday that it will continue buying $85 billion in bonds per month to drive down interest rates and spur economic growth. The central bank also said that it would increase its purchases if needed.

The benchmark 10-year U.S. Treasury was up in price to yield 1.64 percent at the end of EPFR Global's reporting period. The yield on the safe-haven bond subsequently rose to 1.74 percent at the close of trading on Friday after the U.S. government reported jobs growth for April that topped expectations.

Among stock funds, those that hold only U.S. stocks raked in just $1.46 billion over the period, with all of the cash stemming from opportunistic bets on stock exchange-traded funds. Stock mutual funds, which are mainly known to attract mom and pop investors, suffered over $3 billion in outflows.

The modest inflows into stock funds were still an improvement from the prior week, when investors yanked $3.73 billion out of stock funds globally. That was the first week of outflows from the funds since November of last year.

Outflows from money market funds, which are low risk vehicles that invest in short-term securities, continued with investors pulling over $21 billion from the funds in the latest reporting period.

"Money market rates are close to nil," said Sichel of Philadelphia Trust Co. "Investors are more willing to use some of their funds in higher risk and higher reward," he added.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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