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Retail is running from bonds, but are they making a mistake?

Talking Numbers

Since the start of 2013, a net of $70.7 billion have been withdrawn from bond mutual funds. Are retail investors right?

Retail investors are running away from bonds.

Data released by TrimTabs Investment Research shows more outflows from bond mutual funds than ever seen before.

Since the start of 2013, a net of $70.7 billion have been withdrawn from bond mutual funds. That beats the record of $62.5 billion for all of1994. The outflows have now been going on for seven consecutive months. Prior to that, bond funds saw net inflows every month for 21 months.

What changed in May? That was when Federal Reserve Bank Chairman Ben Bernanke hinted that the Fed’s $85 billion monthly bond-buying stimulus program may be tapered should the economy improve. Though the taper has yet to happen, it’s been enough to scare bond investors into selling their fixed income holdings. Along with it, yields on the benchmark US Treasury 10-year bond went from a low of 1.61% in May to 2.98% in September. Trading on the10-year closed at 2.84% on Wednesday.

(Read: Will the Grim Taper be a body blow to the wealthy?)

According to CNBC contributor Gina Sanchez, founder of Chantico Global, there’s a limit to how much higher interest rates can go at the moment given the pace of the economy.

“If you look at the strength of the economy, you probably can't get rates much higher than 3.2% - 3.5%,” says Sanchez. “Beyond that, there's just not enough growth in the economy to support higher rates.”

One measure the Fed has been following is the unemployment rate. Though official unemployment is down to 7%, Sanchez notes that the labor force participation rate is very low. In fact, at 63%, labor force participation is near the lowest it’s been since 1978.

“Structurally, that's bad for growth,” says Sanchez. “While there are definitely signs of recovery, this isn't a very strong recovery. We're not going to have 4.5% growth next year; it's impossible. So, we can't really have 4.5% rates.”

(Watch: Former Bank of Israel Gov. Fischer near Fed vice chair nomination: Reports)

Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, says the charts on the 10-year bond yields show that 4.5% is indeed possible.

“The direction of rates is likely higher but I disagree that there's not room to further upside to 4.5%,” says Ross.” In fact, I'm quite bearish on bond prices and bullish on interest rates; they go higher.”

Recent price movements suggest upside from here, according to Ross. “I think that tells us me that we will get a break above 3%, if not this year, then early 2014,” says Ross. And, as higher bond yields mean lower bond prices, Ross thinks bonds are headed down."

“I would sell those bonds like the masses that are getting out of those bond funds.”

To see why they both believe rates are headed up, watch the rest of Sanchez’s fundamental analysis and Ross’ charts in the video above.

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