* Investors sent $6 bln to stock funds
* Money markets see outflows of $10.5 bln
* Mortgage funds see 70th week of inflows
By Katya Wachtel and Melvin Backman
NEW YORK, July 20 Investors exited money market funds in the latest week as low interest rates led them to look for higher returns in U.S. bond and stock funds, according to data released Friday by fund tracking firm EPFR.
Investors sent $6 billion to U.S stock funds in the week ending July 18, and allocated $3.1 billion to U.S. bond funds.
Funds that specialize in equities have struggled to attract assets in recent months as investors viewed the stock market as too risky with uncertainty around the European sovereign debt crisis and slowing growth in the United States.
Low interest rates are forcing investors back into riskier assets, analysts said.
"When you have close-to-zero money market rates, it makes for some desperation to pick up more yield, and some investors are willing to take up more risk," said Richard Sichel, who oversees $1.5 billion as chief investment officer of Philadelphia Trust Co. "U.S money market rates are not going to be going up in the forseeable future."
While money market funds as a whole suffered withdrawals of $10.5 billion in the latest week, European money market funds attracted $7.74 billion in new capital.
Investors were less comfortable with funds that specalize in European stocks, however, redeeming $308 million from those managers. It was the seventh week out of the past nine that investors fled equities in developed European nations.
But stock funds associated with some of the financially-troubled euro zone nations, such as Portugal, Italy, Ireland, Greece and Spain, did post modest inflows in the latest week.
Spain Equity Funds have taken in new money from investors in 13 of the past 16 weeks, EPFR noted. Money has flowed into those funds, even concern continues about Spain's finances and the health of its banking system.
"I think we got some relief this week that somehow [the situation in Europe] might be coming under control," said Rick Meckler, president of investment firm LibertyView Capital Management.
For the fifth consecutive week, so-called 'junk' bonds, saw more than $1 billion in inflows as investors searched for higher yields in the low-interest rate environment.
Emerging Market bond funds gained $900 million.
Mortgage funds, one of the hottest markets in the credit sector, recorded their 70th consecutive week of inflows, as those funds took in $441 million in new cash.
"All of the commentary on the strengthening of the housing market has led people to believe that the collateral behind mortgage-backed securities are safer," said Rick Meckler, president of investment firm LibertyView Capital Management.
Meanwhile, energy-focused funds experienced inflows of $418 million, and despite several week earnings releases from the U.S banks in the latest week, funds focused on financials gained $339 million.