UPDATE 2-Bond funds worldwide attract $5.3 bln inflow - BofA

Fri Jan 10, 2014 4:19pm EST

By Sam Forgione

NEW YORK Jan 10 (Reuters) - Investors poured $5.3 billion into bond funds worldwide in the latest week while pulling profits out of stock funds after market gains in 2013, data from a Bank of America Merrill Lynch Global Research report showed on Friday.

The inflows into bond funds in the week ended Jan. 8 marked the biggest cash surge since May of last year, while stock funds posted outflows of $400 million. Demand stumbled for funds that mainly hold U.S. stocks, which posted outflows of $2.2 billion.

Investors sought bonds with varying degrees of risk. Investment-grade bond funds, which are viewed as safer given their higher-quality credit ratings, attracted $3 billion.

Riskier high-yield junk bond funds, meanwhile, attracted $1 billion, according to the Bank of America Merrill Lynch report, which also cited data from fund-tracking firm EPFR Global.

The demand for bond funds in the first week of 2014 could mark a reversal in sentiment toward bonds, which sold off last year on worries of a pullback in the U.S. Federal Reserve's $85 billion in monthly bond-buying stimulus.

"As investors take some money off the table in equities, that inevitably forces them into bonds," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington D.C.

Investors also poured nearly $23 billion into money market funds, which are low-risk vehicles that invest in short-term securities, data from EPFR Global showed. That demand lifted inflows into the funds to more than $65 billion over the past three weeks, according to EPFR Global.

"With the (stock) market going down, they're just parking it in money markets," said Alan B. Lancz, president of investment advisory firm Alan B. Lancz & Associates Inc. referring to the decline in U.S. stocks at the start of the year.

APPETITE

Bond funds worldwide attracted a meager $1.4 billion in new cash last year after being hit by persistent withdrawals from the funds, according to data from Bank of America Merrill Lynch and EPFR Global reported by Reuters last week.

Inflows into riskier junk bond funds marked the third straight week of new demand for the funds. Funds that hold government debt, mainly safe-haven U.S. Treasuries, attracted $900 million, marking their largest inflow in 18 weeks.

Despite the appetite for bond funds, the yield on the 10-year U.S. Treasury barely budged over the weekly period and ended at 2.99 percent.

That was still down slightly from a near 2-1/2-year high yield of 3.04 percent more than a week earlier, when investors sold bonds to brace for a cutback in the Fed's stimulus in January. Bond yields move inversely to their prices.

The outflows from stock funds reversed sizable inflows of $4.4 billion into the funds the prior week, which brought inflows to a record $251 billion in 2013. The Fed's bond-buying program kept interest rates low, fueling a record-breaking rally in U.S. stocks and inflows into stock funds.

CAUTION

The outflows of $2.2 billion from funds that specialize in U.S. stocks were the first in three weeks, according to data from Bank of America Merrill Lynch and EPFR Global.

The Standard & Poor's 500 stock index fell 0.5 percent over the weekly period. Investors were cautious, despite data released Wednesday from payrolls processor ADP showing U.S. private employers added a higher-than-expected 238,000 jobs in December, the strongest increase in thirteen months.

Some investors were taking profits after the S&P 500 rallied 29.6 percent in 2013, marking its best year since 1997.

"It will be difficult to repeat the S&P 500's gain," said Alan Gayle, senior investment strategist at RidgeWorth investments. "We would not be surprised if there were a pullback over the near term."

Funds that hold Japanese stocks stood out, with inflows of $1.7 billion, marking the largest inflows since May of last year despite a 1.2 percent decline in Japan's Nikkei average over the weekly period.

Emerging market stock funds posted outflows of $1.3 billion, marking 11 straight weeks of outflows from the funds. That marked the longest outflow streak in 11 years, according to the Bank of America Merrill Lynch report.

The MSCI Emerging Markets Index of global emerging market equities fell 2.7 percent over the reporting period.

Commodities funds, which mainly hold physical gold, posted outflows of $36 million. That marked the ninth straight week of withdrawals from the funds.

Gold prices rose at the start of the period after weaker equities spurred demand for the safe-haven. But prices declined in the last two days on the upbeat U.S. private-sector jobs report and data showing the lowest U.S. trade deficit in four years.