UPDATE 1-Bond funds worldwide post first outflows in 15 weeks -BofA

Fri Jun 20, 2014 1:04pm EDT

(Adds details on flows, investor comments, market performance)

By Sam Forgione

NEW YORK, June 20 (Reuters) - Investors worldwide pulled $2.3 billion out of bond funds in the latest week on lingering concerns the Federal Reserve will hike interest rates, data from a Bank of America Merrill Lynch Global Research report showed on Friday.

The outflows for the week ended June 18 marked the first net withdrawals from the funds in 15 weeks, according to the report, which also cited data from fund-tracker EPFR Global. Stock funds attracted $12.6 billion in inflows, their biggest inflows since February.

Riskier high-yield bond funds posted $700 million in outflows, marking their first withdrawals in 19 weeks, while funds that mainly hold U.S. Treasuries posted $5.4 billion in outflows.

The Fed on Wednesday, at the close of its latest policy meeting, expressed confidence the U.S. economic recovery was on track and hinted at a slightly more aggressive pace of rate increases starting next year. The central bank, however, lowered projections for the long-run target interest rate.

The benchmark U.S. 10-year Treasury note yield fell about 3 basis points to 2.62 percent after the policy decision, underscoring investors' view that the Fed had maintained a dovish stance on rates. Bond yields move inversely to prices.

Not all bond investors took that view, however.

"People have started to recognize that they have too much bond exposure in their portfolio and too much exposure to rates," said Michael Swell, co-head of global fixed income portfolio management at Goldman Sachs Asset Management in New York.

He said the U.S. Treasury market has grown "complacent" with rhetoric from the Fed signaling lower-for-longer interest rates, and that U.S. interest rates are headed higher.

"We expect that, as we continue to see improvement in the U.S. economy, as we see inflation start to pick up, we think that the market will start pricing in a higher probability of Fed action," he said.

Addressing the outflows from high-yield bond funds, Swell said the funds were vulnerable to rising rates. They "potentially could have negative total returns mainly because U.S. Treasury rates are going to go up," he said.

Floating-rate debt funds, which are protected from rising interest rates, posted $600 million in outflows, marking their 10th straight week of withdrawals.

U.S.-focused stock funds attracted $8.4 billion in inflows, while funds that specialize in U.S. utilities stocks attracted a record $1.2 billion in inflows.

The inflows into stock funds showed "growing confidence" that U.S. stocks will head higher, said Scott Wren, senior equity strategist at Wells Fargo Advisors in St. Louis. Investors are showing "a little bit of fear that they don't want to miss more of the run."

Wren also said investors were reaching for dividends in funds that hold utilities shares.

The benchmark S&P 500 has risen about 6 percent this year. The index closed at a record high on Wednesday after the Fed decision and rose 0.7 percent over the weekly period. (Reporting by Sam Forgione; Editing by Leslie Adler)

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