There's a Run on Bond Funds

from Bloomberg:


Bond mutual funds had the biggest client withdrawals in more than two years last week as a flight from fixed-income investments accelerated.

U.S. bond funds experienced withdrawals of $8.62 billion in the week ended Dec. 15, up from $1.66 billion the week before, according to a release from the Investment Company Institute, a Washington-based trade group. Last week's withdrawals were the largest since the week ended Oct. 15, 2008, when investors yanked $17.6 billion from bond funds.

Investors are retreating from bond funds after signs of an economic recovery and a stock market rally increased speculation that interest rates may rise. The selloff in Treasurys accelerated after the Federal Reserve last month pledged to buy $600 billion in assets to revive the economy. The 10-year note yields 3.35 percent, up from 2.49 percent Nov. 4, according to data compiled by Bloomberg.

Most of the money was probably pulled by institutional investors looking to lock in higher yields by buying bonds directly, rather than through funds, said Geoff Bobroff, a consultant based in East Greenwich, Rhode Island.

"I would guess most retail investors are staying put because you aren't seeing the money go anywhere else," he said in a telephone interview.

Vanguard, Pimco

Removals included $3.77 billion from taxable bond funds and $4.85 billion from municipal bond funds. U.S. stock funds had withdrawals of $2.4 billion while foreign equity funds attracted $2.24 billion in the week, ICI said.

Investors put $245 billion into bond mutual funds this year through November, bringing net deposits since the end of 2007 to $636 billion, according to data from Chicago-based Morningstar Inc. Vanguard Group Inc., based in Valley Forge, Pennsylvania, had deposits of $33.4 billion into its bond funds through November while Franklin Resources Inc. of San Mateo, California got $23.7 billion, Morningstar data show.

Pacific Investment Management Co., the Newport Beach, California-based firm that runs the world's biggest mutual fund, attracted $57 billion to its bond funds in the first 11 months of the year.

The $250 billion Pimco Total Return Fund, managed by Bill Gross, had its first net withdrawals in two years in November as investors pulled $1.9 billion, Morningstar reported. Pimco Total Return this month said it is expanding its policy to allow investments in equity-linked securities for the first time since 2003.

"Fixed-income has been the lifeline for a lot of these firms," Douglas Sipkin, an analyst with Ticonderoga Securities in New York, said in an interview earlier this month.

Pimco this month raised its forecast for U.S. economic growth next year as policy makers pump a "massive amount" of stimulus into the economy, Chief Executive Officer Mohamed El-Erian said.