UPDATE 2-U.S.-based bond mutual funds post record $28.1 bln outflow-ICI

Wed Jul 3, 2013 4:08pm EDT

By Sam Forgione
    NEW YORK, July 3 (Reuters) - Investors in mutual funds based
in the United States pulled $28.1 billion out of bond funds in
the latest week as interest rates rose on fears the U.S. Federal
Reserve could cut its bond-buying later this year, data from the
Investment Company Institute showed on Wednesday.
    The outflows from bond mutual funds in the week ended June
26 were the most since weekly records began in January 2007,
said ICI, a U.S. mutual fund trade organization. Municipal bond
funds also suffered record outflows of $7.68 billion over the
week.
    Investors have pulled cash out of bond funds as increasing
interest rates have made fixed-income securities vulnerable to
price losses. The yield on the benchmark 10-year U.S. Treasury
note rose 81 basis points between the start of May and the end
of June to 2.49 percent. As yields rise, prices fall. 
    The Treasury market has come under severe selling pressure
as fears lingered that the Fed might reduce its $85 billion in
monthly purchases of Treasuries and agency mortgage securities
later this year. Fed Chairman Ben Bernanke reiterated on June 19
that the central bank could reduce its purchases later this year
and end them altogether by mid-2014 if the economy looked strong
enough.
    The latest outflows from bond funds also marked a big leap
from outflows of $7.97 billion the prior week. Bond funds
suffered four consecutive weeks of outflows in June totaling
roughly $60.5 billion in assets. 
    The outflows from bond mutual funds over the entirety of
June, meanwhile, amount to slightly less than 2 percent of total
assets, according to an unreleased estimate from ICI. Those
outflows did not come as a shock given the degree to which
interest rates have risen over the past two months, according to
a statement from Brian Reid, chief economist at ICI. 
    "This is about what we would have expected with the kind of
interest rate increases we have seen during the past two
months," Reid said on the outflows from bond mutual funds in
June. He added that the latest week's record outflows were "not
surprising."
    Stock mutual funds gained meager inflows of $169 million
over the week, down from inflows of $1.98 billion the prior
week. The benchmark S&P 500 stock index fell 1.6 percent
over the reporting period as volatility increased on fears of a
reduction in the Fed's accommodative monetary policy. 
    Inflows of $1.13 billion into funds that hold non-U.S.
stocks accounted for the overall inflows into stock funds. Those
cash gains were down, however, from inflows of $2.44 billion
into the funds the prior week. 
    Funds that hold only U.S. stocks had outflows of $962
million over the week, marking the sixth straight week of
outflows from the funds. Those outflows were more than double
those of the prior week, when investors pulled $457 million out
of the funds.
    Hybrid funds, which can invest in both stocks and fixed
income securities, suffered outflows of $591 million. That
marked the first week of outflows from the funds over any full
week this year, according to ICI data.
    The following is a breakdown of estimated ICI flows for the
past five weeks (all figures in millions of dollars):
    
               5/29/13   6/5/13  6/12/13  6/19/2013  6/26/2013
 Total Equity     -999     -932   -1,032      1,980        169
    Domestic    -1,712   -2,522   -2,285       -457       -962
    World          713    1,590    1,253      2,437      1,132
 Hybrid*         1,127      347    1,147        679       -591
 Total Bond      1,360  -10,910  -13,468     -7,972    -28,122
    Taxable      1,576   -8,655  -10,232     -4,604    -20,446
    Municipal     -216   -2,256   -3,236     -3,368     -7,676
 Total           1,488  -11,495  -13,353     -5,313    -28,543
  * Hybrid funds can invest in stocks and/or fixed-income
securities.
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