August 8, 2014 / 2:45 PM / in 3 years

UPDATE 2-High-yield bond funds worldwide post record outflows -BofA

4 Min Read

(Adds flows, market performance)

By Sam Forgione

NEW YORK, Aug 8 (Reuters) - Investors worldwide pulled a record $11.4 billion out of high-yield junk bond funds and bailed out of stock funds at the most frantic pace in six months in the week ended Aug. 6, data from a Bank of America Merrill Lynch Global Research report showed on Friday.

The outflows offered one of the strongest signals yet of growing wariness over risk assets. Stock funds posted net outflows of $16.3 billion, their biggest since February.

The outflows from junk bond funds marked a fourth straight week of withdrawals. The outflows were the greatest amount since records began in 2002 and the biggest as a percentage of the funds' assets under management since August 2011.

Bond funds overall posted $3.2 billion in net outflows, marking their first withdrawals in seven weeks, according to the report, which also cited data from fund-tracker EPFR Global.

The outflows from junk bond funds underscored growing investor concerns about stretched valuations in the securities after the sector's multi-year rally.

The U.S. Federal Reserve's policy of keeping interest rates low has attracted many investors to high-yield bond funds amid a lack of alternatives, and those investors are "ready to leave at the first sign of trouble," said Martin Fridson, chief investment officer of wealth management firm Lehmann Livian Fridson LLC.

He said investors were also fearful of an earlier-than-expected Fed hike in interest rates. Analysts have said that strong U.S. labor market and economic growth data could prompt the central bank to raise rates from rock-bottom levels earlier than expected, which would hurt bond prices.

Emerging market debt funds and floating-rate loan funds also posted outflows, of $600 million and $1.6 billion, respectively. They were the first outflows from emerging market bond funds in 19 weeks and the biggest withdrawals from floating-rate loan funds since August 2011, according to the report.

Funds that mainly hold safe-haven U.S. Treasuries, whose prices gained over the latest week amid a rout in stock markets worldwide, attracted $4.2 billion in new cash, their biggest inflows since February.

The record outflows from high-yield bond funds came during a period that overlapped with one of the roughest weeks for the junk bond market in years, according to Bank of America/Merrill Lynch Fixed Income Index data.

High-yield bonds delivered a negative total return of 1.42 percent in the week ended Aug. 1, their worst weekly performance in more than two years. The yield premium investors demand for holding these low-rated bonds shot up by 0.50 percentage point to more than 4.2 percentage points above comparable U.S. Treasury debt. Just over a month ago, that spread had been as low as 3.35 percentage points, the smallest since 2007.

The net outflows from stock funds came after inflows of $11.3 billion the prior week, which were the biggest in six weeks. U.S.-focused stock funds posted $19 billion in outflows, with the SPDR S&P 500 ETF Trust accounting for $14 billion of the withdrawals, according to the report.

European stock funds posted $2 billion in outflows, their biggest outflows since May 2013 and their fifth straight week of withdrawals. Emerging market stock funds bucked the trend, attracting $3.9 billion in new cash, their ninth straight week of inflows. (Reporting by Sam Forgione; Editing by James Dalgleish, Meredith Mazzilli and Leslie Adler)

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