By Sam Forgione
NEW YORK, Oct 4 (Reuters) - Investors pulled a record $61.5billion from bond funds worldwide in the third quarter, datafrom fund-tracking firm EPFR Global showed Friday, amid fearsthat the Federal Reserve would begin scaling back itsbond-buying program.
The outflows for the quarter ended Sept. 30 were the biggestsince EPFR Global began tracking bond funds overall in January2004. Expectations grew during the quarter that the Fed wouldreduce its $85 billion in monthly bond purchases at itsSeptember meeting, sending yields higher as investors betinterest rates would spike if the Fed scaled back stimulus.
The yield on the 10-year U.S. Treasury note briefly roseabove 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 risinginterest rates because they are pegged to floating-ratebenchmarks, attracted $21 billion in new cash over the quarter.
U.S. bond funds accounted for $41 billion of the totalwithdrawals from bond funds over the quarter. Investors alsopulled $17.4 billion from emerging market bond funds over thequarter, marking the biggest outflows since EPFR Global begantracking the funds in late 2003.
The Fed's easy money policies have led investors to seekhigher yield in emerging market assets, but emerging marketslost some of their luster as expectations of a Fed pullbackgrew.
The Fed surprised investors on Sept. 18 when it said itwould maintain the pace of its bond purchases and await moreevidence of solid economic growth.
The yield on the 10-year Treasury plunged 17 basis points to2.69 percent following the decision. Investors poured $26billion into stock funds in the week ended Sept. 18, the most onrecord since 1992 according to data from a Bank of AmericaMerrill Lynch Global Research report and EPFR Global.
In the week ended Oct. 2, investors pulled $900 million frombond funds, reversing the prior week's inflows of $4.5 billion.Funds that hold government debt, mainly Treasuries, had outflowsof $2.7 billion in the latest week, according to Bank of AmericaMerrill Lynch and EPFR Global.
Funds that hold Treasury inflation-protected securities(TIPS) had withdrawals of $200 million, which marked the 25thstraight week of withdrawals from the funds, according to theBank of America Merrill Lynch report,.
TIPS prices have been hit by a bond market selloff followingsignals in May that the Fed could scale back its bond purchasesthis year. The Barclays U.S. TIPS Index was down 6.6 percent forthe year.
Emerging market bond funds had $200 million in outflows inthe latest week, reversing inflows of $600 million the priorweek. Investors showed appetite for high-yield junk bond funds,however, which pulled in $1.3 billion in new cash in the latestweek. The inflows marked their fourth straight week of newdemand.
While investors exited bond funds in the third quarter, theypoured $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 latesttwo 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 thebudget, leading to the U.S. government shutdown that began onOct. 1.
The shutdown was the first in 17 years. Worries also grew ofa looming fight between Democratic and Republican lawmakers overraising the U.S. debt ceiling. The United States could face anunprecedented default if Congress does not raise the $16.7trillion debt limit by Oct. 17.
Outflows from stock and bond funds over the past two weekshave been small, compared with outflows of $60 billion over thethree weeks beginning July 28, 2011, the report said. Thoseoutflows came during a prior round of debt ceiling debates thatled Standard & Poor's to cut the U.S. credit rating from AAA toAA-plus.
Emerging market stock funds had outflows of $2.1 billion inthe week ended Oct. 2, marking their first outflows in fourweeks, the report said. U.S. stock funds had outflows of $600million, a fraction of the prior week's outflows of $7.4billion.
Despite worries over the U.S. government shutdown and debtceiling, the S&P 500 stock index rose a slight 0.1percent over the weekly period. MSCI's emerging market stocksindex fell 1 percent.
European stock funds, meanwhile, attracted $900 million innew cash, down from inflows of $2.3 billion the prior week. Itwas the 14th straight week of inflows.
The FTSEurofirst 300 Index 's decline of 0.8 percentover the weekly period.
- Mutual Funds