By Sam Forgione
NEW YORK, June 28 (Reuters) - Investors pulled $23.3 billion out of bond funds in the latest week, the biggest outflow since records started in 1992, as fears persisted that the U.S. Federal Reserve might reduce its bond-buying, data from EPFR Global and Bank of America Merrill Lynch showed on Friday.
Funds that invest in high-yield junk bonds suffered outflows of $6.8 billion in the week ended on Wednesday. Other outflows included $4.9 billion from investment-grade corporate bond funds, $5.6 billion from emerging market bond funds, $4.5 billion from U.S. municipal bond funds, and $1.3 billion from mortgage-backed securities funds.
Each of those outflow figures marked a record, according to Bank of America Merrill Lynch and EPFR Global data. The outflows from U.S. municipal bond funds, mortgage-backed securities funds, investment-grade corporate bond funds, and high-yield bond funds were the most since records began in 1992. The outflows from emerging market bond funds were the most since records began in 2004.
“This is just the beginning of a reallocation,” said Michael Temple, portfolio manager at Pioneer Investments, which oversees roughly $216.6 billion in assets globally. Temple said that fears of rising interest rates in response to the Fed’s signals that it may cut its bond-buying reached a peak during the latest week.
Fed Chairman Ben Bernanke sparked a selloff in bond markets when he told Congress on May 22 that the central bank could reduce its $85 billion in monthly purchases of Treasuries and agency mortgage bonds later this year. He reiterated on June 19 that the central bank could reduce the purchases later this year and added that the Fed could end them altogether in mid-2014 if the U.S. economy looked strong enough.
Temple said that bond managers should expect to see outflows from their funds over the next year and a half as investors put more money into U.S. stocks, which he expects will outperform bonds as corporate revenue growth in the U.S. picks up later this year and into 2014.
U.S. bond funds were hit hard, with outflows of $10.6 billion. The yield on the benchmark 10-year U.S. Treasury note rose 19 basis points to 2.54 percent over the week, sending bond prices lower.
Investors also pulled an additional $700 million out of funds that hold Treasury Inflation-Protected Securities or TIPS in the latest week after having pulled $1 billion from them the prior week.
Precious metals funds had their 20th straight week of outflows, at $2.8 billion. The price of spot gold fell 9.3 percent over the week to its lowest in nearly three years, also on fears that the Fed would rein in its monetary policy.
Funds that hold floating-rate loans remained a bright spot. Investors put $1.1 billion in new cash into the funds in the latest week, marking 53 consecutive weeks of inflows, according to Bank of America Merrill Lynch. Floating-rate loans are protected from rising interest rates by being pegged to floating-rate benchmarks.
Global stock funds suffered $13.1 billion in outflows, reversing inflows of $4.8 billion during the prior week. The Standard & Poor’s 500 stock index fell 1.6 percent over the reporting period. Funds that hold U.S. stocks suffered outflows of $3.9 billion, reversing inflows of $7 billion the prior week.
Investors also pulled $5.8 billion out of funds that hold emerging markets stocks. The funds have suffered outflows amounting to 2.7 percent of total assets in the past four weeks, according to Bank of America Merrill Lynch.
The MSCI Emerging Markets Index, which measures the equity market performance in global emerging markets, fell 4.7 percent over the weekly period.
The big outflows from emerging markets stock funds shows excessive pessimism toward the assets, said Brian Leung, global equity strategist at Bank of America Merrill Lynch. The pessimism indicates that emerging markets stocks are moderately undervalued, and investors should consider buying them, Leung said.
Investors still put $500 million into Japanese stock funds, however, marking 23 straight weeks of inflows. The Bank of Japan’s monetary stimulus helped boost Japan’s Nikkei average 50 percent this year through May 22, but the index plunged nearly 17.9 percent between May 22 and the end of EPFR Global’s weekly reporting period.
“You’re now getting a buy on the dip mentality,” said Robert Francello, head of equity trading for Apex Capital in San Francisco, on the continued inflows into Japanese stock funds despite the pullback in the Nikkei average.