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U.S. high-grade bond fund outflows fastest since March

(Adds data on mutual funds and ETFs, analyst's quote, table, byline) By Trevor Hunnicutt NEW YORK, Oct 13 (Reuters) - Demand for U.S.-based bond funds showed signs of waning in the latest week, with investors pulling cash from investment-grade corporate debt funds at the fastest rate since March, Lipper data showed on Thursday.

Investors, who have feasted on high-quality corporate debt this year, have become more wary of a potential interest rate hike by the Federal Reserve before year-end that could cut bond values.

Corporate bond prices have leapt this year, with the widely traded iShares iBoxx $ Investment Grade Corporate Bond ETF delivering more than 9 percent returns.

While recent withdrawals have been moderate compared to the strong inflows earlier this year, the data showed high-grade bond funds returned $666 million in cash to investors during the seven days through Oct. 12, the fastest rate of outflows in seven months.

So far this year, the funds have taken in $90 billion.

"Investment grade took it on the chin," said Tom Roseen, Thomson Reuters Lipper's head of research services. "This is tied to the Fed. People are saying, 'We think they're going to pull the trigger in December.'" Minutes from the Fed's most recent meeting in September showed several policymakers judged a rate hike would be warranted "relatively soon." Overall, U.S.-based taxable bond funds posted $2.1 billion in withdrawals during the week, Lipper said.

High-yield junk bond funds had $72 million in withdrawals, and investors pulled $385 million from Treasury funds.

Withdrawals were concentrated in taxable-bond mutual funds, which had $3 billion in outflows, while Lipper said their exchange-traded fund counterparts added $898 million.

Investors were willing to take some risk outside the United States during the week.

Non-U.S. stock funds attracted $561 million and their first week of inflows since late August, Lipper said, even as funds focused on domestic shares posted $4 billion in outflows.

Emerging market stock funds took in $764 million, and Japanese equity funds added $106 million in their first week of inflows since July. Chinese stock funds took in $39 million in their ninth consecutive week of inflows, the data showed.

Lipper also said money-market funds posted $10.6 billion in withdrawals during the week, their second straight week of outflows. This came ahead of reforms, taking effect on Friday, that would force some funds to let their share prices float with the market.

The following is a broad breakdown of the flows for the week, including ETFs: Sector Flow Chg % Assets Assets Count ($blns) ($blns) All Equity Funds -3.395 -0.06 5,267.371 12,051 Domestic Equities -3.957 -0.11 3,712.742 8,605 Non-Domestic Equities 0.561 0.04 1,554.629 3,446 All Taxable Bond Funds -2.140 -0.09 2,316.558 6,056 All Money Market Funds -10.577 -0.46 2,290.114 1,047 All Municipal Bond Funds 0.147 0.04 393.995 1,417 (Reporting by Trevor Hunnicutt; Editing by Jennifer Ablan and Richard Chang)