By Sam Forgione
NEW YORK, Oct 4 (Reuters) - Investors pulled a record $61.5 billion from bond funds worldwide in the third quarter, data from fund-tracking firm EPFR Global showed Friday, amid fears that the Federal Reserve would begin scaling back its bond-buying program.
The outflows for the quarter ended Sept. 30 were the biggest since EPFR Global began tracking bond funds overall in January 2004. Expectations grew during the quarter that the Fed would reduce its $85 billion in monthly bond purchases at its September meeting, sending yields higher as investors bet interest rates would spike if the Fed scaled back stimulus.
The yield on the 10-year U.S. Treasury note briefly rose above 3 percent on Sept. 5, a level not seen since July 2011. Bond yields move inversely to their prices.
Funds that hold bank loans, which are protected from rising interest rates because they are pegged to floating-rate benchmarks, attracted $21 billion in new cash over the quarter.
U.S. bond funds accounted for $41 billion of the total withdrawals from bond funds over the quarter. Investors also pulled $17.4 billion from emerging market bond funds over the quarter, marking the biggest outflows since EPFR Global began tracking the funds in late 2003.
The Fed's easy money policies have led investors to seek higher yield in emerging market assets, but emerging markets lost some of their luster as expectations of a Fed pullback grew.
The Fed surprised investors on Sept. 18 when it said it would maintain the pace of its bond purchases and await more evidence of solid economic growth.
The yield on the 10-year Treasury plunged 17 basis points to 2.69 percent following the decision. Investors poured $26 billion into stock funds in the week ended Sept. 18, the most on record since 1992 according to data from a Bank of America Merrill Lynch Global Research report and EPFR Global.
In the week ended Oct. 2, investors pulled $900 million from bond funds, reversing the prior week's inflows of $4.5 billion. Funds that hold government debt, mainly Treasuries, had outflows of $2.7 billion in the latest week, according to Bank of America Merrill Lynch and EPFR Global.
Funds that hold Treasury inflation-protected securities (TIPS) had withdrawals of $200 million, which marked the 25th straight week of withdrawals from the funds, according to the Bank of America Merrill Lynch report,.
TIPS prices have been hit by a bond market selloff following signals in May that the Fed could scale back its bond purchases this year. The Barclays U.S. TIPS Index was down 6.6 percent for the year.
Emerging market bond funds had $200 million in outflows in the latest week, reversing inflows of $600 million the prior week. Investors showed appetite for high-yield junk bond funds, however, which pulled in $1.3 billion in new cash in the latest week. The inflows marked their fourth straight week of new demand.
While investors exited bond funds in the third quarter, they poured $73 billion into stock funds, according to EPFR Global. The S&P 500 rose 4.7 percent over the quarter.
Investors have pulled cash out of stock funds in the latest two weeks, however, according to Bank of America Merrill Lynch.
Stock funds had outflows of $1.3 billion in the latest week, which came as Congress failed to reach an agreement on the budget, leading to the U.S. government shutdown that began on Oct. 1.
The shutdown was the first in 17 years. Worries also grew of a looming fight between Democratic and Republican lawmakers over raising the U.S. debt ceiling. The United States could face an unprecedented default if Congress does not raise the $16.7 trillion debt limit by Oct. 17.
Outflows from stock and bond funds over the past two weeks have been small, compared with outflows of $60 billion over the three weeks beginning July 28, 2011, the report said. Those outflows came during a prior round of debt ceiling debates that led Standard & Poor's to cut the U.S. credit rating from AAA to AA-plus.
Emerging market stock funds had outflows of $2.1 billion in the week ended Oct. 2, marking their first outflows in four weeks, the report said. U.S. stock funds had outflows of $600 million, a fraction of the prior week's outflows of $7.4 billion.
Despite worries over the U.S. government shutdown and debt ceiling, the S&P 500 stock index rose a slight 0.1 percent over the weekly period. MSCI's emerging market stocks index fell 1 percent.
European stock funds, meanwhile, attracted $900 million in new cash, down from inflows of $2.3 billion the prior week. It was the 14th straight week of inflows.
The FTSEurofirst 300 Index 's decline of 0.8 percent over the weekly period.