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Cash Rushes out of Treasury ETFs


Government bond mutual funds are seeing record outflows after speculation on Fed tapering sent investors running, while alternative fixed-income exchange traded funds have been thrown into the limelight.

According to TrimTabs Investment Research, investors pulled $70.7 billion out of bond funds this year, reports Charles Stein for Bloomberg. If investors don’t dive back into bonds in the next couple of weeks, redemptions would surpass the previous record $62.5 billion investors took out of bond mutual funds in 1994.

Investors have exited bond funds since May when the Fed hinted at easing its accommodative measures. Yields on the benchmark 10-year Treasury notes have jumped over 120 basis points from the May low.

“The ‘taper talk’ that started in May proved to be a huge inflection point for the credit markets,” David Santschi, chief executive officer of TrimTabs, said.

Investors reacted differently to various areas in the fixed-income fund market. For instance, intermediate-term bond funds, the most popular category in fixed-income, saw $63.4 billion in withdrawals through October. The iShares 7-10 Year Treasury Bond ETF (IEF) saw $518.9 million in outflows so far this year.

Morningstar data reveals that municipal bond funds experienced $43.9 billion in outflows as investors reacted to fiscal problems in Puerto Rico and the Detroit bankruptcy. The iShares National AMT-Free Muni Bond ETF (MUB) saw $226.8 million in net redemptions year-to-date. [Muni Bonds, ETFs Experience Heavy Outflows]

Corporate bonds, while holding up in the bond scuffle, have experienced heavy outflows. The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) saw $8.5 billion in outflows year-to-date. [Corporate Bond ETFs Steady as Issuance Soars]

UBS AG and Citigroup Inc. analysts. JPMorgan Chase & Co. analysts predict that investment-grade bonds will likely continue to decline in 2014.

Non-traditional bond funds, on the other hand, have attracted $48 billion over the first 10 months of the year. Funds that hold bank loans, which track floating-rate bonds that adjust to rising interest rates, gathered $57.7 billion in assets. The PowerShares Senior Loan Portfolio (BKLN) has attracted an impressive $4.8 billion so far this year. [Bank Loan ETFs Continue to Thrive]

“There is a suggestion that the managers of these funds will outfox the rising rate environment,” Eric Jacobson, a Morningstar analyst, said in the article.

For more information on bonds, visit our bond ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.