| NEW YORK
NEW YORK Dec 21 Investors finally soured toward
bond funds and favored riskier stock exchange-traded funds in
the latest week despite gridlock over negotiations to avert the
nearing "fiscal cliff" and a typically cautious year-end trading
EPFR Global, a fund-tracking firm, said on Friday that
investors around the world pulled $3.87 billion from funds that
hold U.S. bonds in the week ended Dec. 19, the most in roughly a
year and a half. The outflows account for most of the total
outflow of $4.1 billion from bond funds worldwide.
It has been another strong year of cash inflows into U.S.
bond funds, which have raised concerns about a potential bond
bubble. Money managers, particularly fixed-income investors,
have warned that the solid rise in bond prices cannot go on
forever. Junk bonds and corporate debt "which we felt good about
a year ago ... we now feel OK about," said Tad Rivelle, chief
investment officer of fixed income at TCW, which has $135
billion in assets under management.
For their part, stock funds globally attracted inflows of
$5.56 billion, keeping up demand after the funds gained $8.88
billion in new money the previous week. Inflows into funds that
hold U.S. stocks accounted for $1.16 billion of that total.
Emerging market stock funds accounted for much of the overall
demand for stock funds worldwide with inflows of $4.44 billion.
The overall inflows into stock funds was mostly a result of
investors piling into exchange-traded funds, EPFR Global said.
ETFs, which are generally believed to represent the behavior of
institutional investors, can be used opportunistically to bet on
ETFs that track the benchmark S&P 500 stock index
offer higher yields and dividend growth compared to the low
interest rates on bond funds, said Jim Awad, managing director
at Zephyr Management in New York.
NO ROOM FOR RISKY BONDS
Among bond funds, riskier high-yield "junk" bond funds had
outflows of $281 million, the first outflows from the funds in
four weeks after attracting more than $1 billion in inflows in
each of the past three weeks.
Funds that specialize in European bonds, which are also
considered risky given the region's debt crisis, had outflows of
$1.03 billion, the most in over six months according to EPFR
Global and a reversal of $1.07 billion in inflows the prior
Yields on European debt have come down as prices have
rallied, leading many to believe that the risk is not worth the
investment, Awad of Zephyr Management said.
The S&P 500 rose 0.51 percent over the reporting period
despite gridlock between U.S. President Barack Obama and U.S.
Republican House Speaker John Boehner in talks to avert the
looming "fiscal cliff" of tax hikes and spending cuts that
threatens to tip the U.S. into recession.
The yield on the benchmark 10-year Treasury fell to 1.75
percent in intraday trading Friday in the wake of House Speaker
Boehner's failure to win support from his Republican party for a
proposal that aimed to limit income-tax increases to those
earning $1 million and more, a much smaller slice of taxpayers
than Obama wants to pay higher taxes.
The data from EPFR Global, which tracks the sales behavior
of investors globally toward funds stationed around the world,
roughly coincided with data from Thomson Reuters' Lipper
service, which reports weekly flows for funds based exclusively
in the U.S. over the same reporting period.
With regard to these U.S.-based funds, investors pulled $1.6
billion out of bond funds, which was modestly lower than the
highest outflows this year of $1.65 billion in May.
Investors are "harvesting accumulated gains of the past
several years" from bond funds as interest rates grind lower and
expectations for higher tax rates kick in, said Alan Gayle,
senior investment strategist at RidgeWorth Investments.
A pullback from bond ETFs accounted for the total outflow
from bond funds as investors yanked $1.61 billion from the index
funds, which was the most this year.
Bond mutual funds did little to offset the pullback from
bond ETFs and attracted meager inflows of just $8.57 million,
the weakest showing for the funds in seven weeks.
Investors were averse to bonds across the risk spectrum and
took $34.1 million out of funds that hold investment-grade
corporate bonds, which is the first time the funds have suffered
outflows since June.
Investors also took $344.74 million out of high-yield bond
funds, the investment-grade funds' riskier counterpart, which is
the first outflow for the group in four weeks.
INVESTORS SOUR ON STOCK MUTUAL FUNDS
U.S.-based stock mutual funds, meanwhile, suffered the
biggest outflows this year of $6.43 billion over the period. The
pullback is the most dramatic since August of last year.
Stock ETFs stationed in the U.S., however, showed similar
results to those from EPFR Global on stock ETFs worldwide, with
the funds gaining inflows of $5.85 billion.
Overall, U.S.-based stock funds- including both mutual funds
and exchange-traded funds- had net outflows of $582.6 million,
the first time the funds have returned money to investors in
four weeks and showing a sudden drop in demand after net inflows
of nearly $5 billion the previous week.