U.S. taxable bond funds suffer third week of outflows: Lipper

NEW YORK Thu Jun 20, 2013 9:06pm EDT

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NEW YORK (Reuters) - Investors in funds based in the United States pulled $508 million out of taxable bond funds in the latest week, marking the first three-week outflow streak from the funds since August 2011, data from Thomson Reuters' Lipper Service showed on Thursday.

The outflows from taxable bond funds in the week ended June 19 occurred largely ahead of Federal Reserve Chairman Ben Bernanke's comments on Wednesday that the central bank may reduce its $85 billion in monthly bond purchases later this year if the economy is strong enough. Bernanke also said the central bank may end the program altogether in mid-2014.

Bernanke's comments followed the Federal Reserve policymaking committee's decision to continue the pace of its monthly bond buying. The Fed is buying Treasuries and agency mortgages in an effort to lower long-term borrowing costs and spur hiring.

"It's hard to dismiss the Fed's role in the selling this week," said Jeff Tjornehoj, head of Americas research at Lipper, of the continued selloff in the bond market and, consequently, the outflows from bond funds.

The latest outflows from taxable bond funds came after investors pulled $5.51 billion from the funds the previous week.

Investors have pulled $15.1 billion out of taxable bond mutual funds and exchange-traded funds over the past three weeks in the wake of Bernanke's comments on May 22 that the Fed could begin winding down its stimulus this year if the U.S. economy looked set to maintain momentum.

The outflows in the latest week stemmed from investors pulling $619.1 million out of taxable bond mutual funds. Taxable bond ETFs, meanwhile, had inflows of $111.24 million, the first cash gains into the index funds in six weeks.

ETFs are generally believed to represent the investment behavior of institutional investors, while mutual funds are thought to represent the retail investor.

Bond traders reacted negatively to the Fed's announcement and Bernanke's comments, with the 10-year Treasury yield rising to 2.36 percent, a level not seen since March 2012 and up 17 basis points on Wednesday alone.

Investors also pulled $332.9 million out of high-yield junk bond funds in the latest week, marking the fourth straight week of outflows. Outflows the previous week were $3.3 billion.

Investors also pulled $22.15 billion out of money market funds, which are low-risk vehicles that invest in short-term securities. The outflows overshadowed the prior week's outflows of $5.22 billion.

Funds that hold floating-rate bank loans remained a bright spot in the latest week. Investors poured $1.4 billion into the funds, which was slightly more than inflows of $1.35 billion the prior week. Floating-rate loans are protected from rising interest rates by being pegged to floating-rate benchmarks.

Funds that hold investment-grade corporate bonds, which offer a stronger credit rating than high-yield debt, also gained demand and broke a two-week streak of outflows with inflows of $647.3 million.

While taxable bond funds saw outflows, appetite for stock funds increased. Investors poured $4.71 billion into the funds, reversing three straight weeks of outflows. Investors gave $1.48 billion to stock mutual funds and $3.2 billion to stock ETFs.

The S&P 500 rose 1.02 percent over the reporting period on expectations that the Fed would maintain the pace of its stimulus. Positive data on U.S. manufacturing growth, retail sales and homebuilder sentiment contributed to the rise.

"People are willing to take on a little more risk," said Tjornehoj of Lipper. He said that investors may be buying on the general weakness in U.S. stocks since Bernanke's comments on May 22 tipped U.S. stock markets downward. The S&P 500 had fallen 1.6 percent between the day Bernanke made his remarks last month and the end of Lipper's latest reporting period.

Worries that the Fed might pull back its bond-buying disrupted a 17 percent rise in the S&P 500 from the beginning of the year through May 21. The Fed's stimulus has underpinned the rise in stock markets this year, as low interest rates on bonds have led investors to seek higher income in stocks.

Funds that hold Japanese stocks suffered outflows of $183.4 million, marking the third straight week of outflows from the funds. Investors broke a 28-week streak of inflows when they pulled $531.8 million out of the funds in the first week of June.

"There's some Abenomics fatigue," said Tjornehoj, in reference to Japanese Prime Minister Shinzo Abe and the Bank of Japan's effort to inject $1.4 trillion into the economy in less than two years to fight deflation.

The stimulus, which the Bank of Japan announced on April 4, helped boost Japan's Nikkei average to a 5-1/2-year peak of 15,942.60 on May 23. Since then, the index has dropped more than 10 percent.

Funds that hold emerging market stocks suffered outflows for the fourth straight week, as investors pulled out $1.1 billion. The MSCI world equity index, however, rose 1 percent over the weekly period.

Funds that mainly invest in gold futures suffered outflows of $464.7 million in the latest week, the biggest outflows in three weeks. Tjornehoj said investors pulled cash out of gold funds on expectations that the Fed would reduce its bond-buying. Gold is viewed as a safe-haven during stimulus programs, which typically weaken a nation's currency.

The weekly Lipper fund flow data is compiled from reports issued by U.S.-domiciled mutual funds and exchange-traded funds.

(Reporting by Sam Forgione; Editing by Bernard Orr and Jim Loney)

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