BOND MARKET LIQUIDATION: Bond Funds Hit With Biggest Outflows Ever This Week

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BofAML Global Research, EPFR Global

Apparently this was the week where the rush for the exits in the bond market really hit a crescendo.

In the week ended June 26, investors pulled a record $23.3 billion from bond funds. And it was a record across every type of fund: emerging markets, high yield, investment grade, and mortgage-backed securities funds all saw their largest weekly outflows ever.

Bond funds shrank by 0.9% this week, marking the second-largest weekly loss on record in terms of assets under management.

BofA Merrill Lynch Chief Investment Strategist Michael Hartnett calls it "bond market liquidation" in a note to clients.

Hartnett compares this week's outflows to the capitulation observed at the height of the financial crisis in October 2008.

After falling 2.1% over four weeks leading into the big outflow, Treasuries rallied 5.2% over the next six weeks.

The yield on the 10-year U.S. Treasury note hit a high of 2.64% on Monday, but the bonds have rallied this week, and the 10-year is now trading at 2.48%.

Below is a breakdown of this week's flows, via Hartnett:

Flows by Asset Class

Bonds: largest ever $23.3bn outflows! ($58bn over 4 weeks)

Equities: $13.1bn outflows ($6.4bn via ETF's and $6.7bn via LO funds)

Precious metals: $2.8bn outflows (20 straight weeks);  MMF: $4.3bn inflows 

Flows by Fixed Income Sector

Largest ever outflows from EM debt funds ($5.6bn or 2.3% of AUM); intensity of EM debt redemptions now only exceeded by 2008 melt-down (Chart 3) 

Largest ever outflows from Munis ($4.5bn); Largest ever outflows from IG funds ($4.9bn);

Largest ever outflows from HY funds ($6.8bn); Largest ever outflows from MBS funds ($1.3bn);

53 straight weeks of inflows to leveraged loan funds ($1.1bn) 

Flows by Equity Region

$5.8bn outflows from EM equity funds, just shy of "hard" buy signal; But 4w outflows of 2.7% AUM is huge and argues a "soft" buy signal has been triggered for EM, especially in conjunction with our Global Breadth Rule. Last "soft" buy signal triggered in Feb'13, after which EEM bounced 10% over nxt 6w

Interestingly, Brazil sees first inflows in 18 weeks ($0.4bn)

$3.9bn outflows from US equity funds; modest $0.4bn outflows from Europe;  $0.5bn inflows to Japan (now 23 straight weeks) 

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