Who Goes to Cash Shows Extent Bonds Will Become Bear Market

Bloomberg -- Investors who poured $1.26 trillion into bond funds in the past six years pulled out record amounts of cash last month, leaving the world’s biggest fixed-income managers struggling to stem the flow.

The funds saw $61.7 billion of withdrawals as money market mutual fund assets rose $8.17 billion in the week ended June 25, according to TrimTabs Investment Research and the Money Fund Report. Bank of America Merrill Lynch’s Global Broad Market Index dropped 2.9 percent in the past two months, the most since the inception of the daily gauge in 1996, as Federal Reserve Chairman Ben S. Bernanke laid out possibilities for reducing the $85 billion in monthly bond purchases supporting the economy.

Market bears say losses are just getting started because yields barely exceed inflation, leaving little relative value in bonds as the global economy improves. Pacific Investment Management Co., BlackRock Inc. and DoubleLine Capital LP, which together oversee about $6 trillion in assets, said the worst is already over because the securities are fairly valued.

“We are at a definite inflection point,” Richard Schlanger, who helps invest $20 billion in fixed-income securities as a vice president at Pioneer Investments in Boston, said in a telephone interview on June 28. “If this thing continues in this vein, people are going to throw in the towel and you’re going to get this pain trade. And the markets can’t take it. They’d rather see a gradual rise in short-term rates versus a precipitous rise.”


Pioneer has held a smaller percentage of Treasuries in 2013 than is contained in the benchmark index against which it tracks performance, and is investing in short-term floating-rate notes and non-agency mortgage-backed securities, Schlanger said.

The Bank of America Merrill Lynch U.S. Broad Market index has plummeted 3.5 percent in May and June, the worst decline since a 3.9 percent dive in the two months ended October 2008 as the failure of Lehman Brothers Holdings Inc. ushered in the worst financial crisis since the Great Depression. Treasuries lost 3.3 percent in the last three months, for their third straight quarterly decline.

Record bond-fund redemptions in the month ended June 24 surpassed the previous high of $41.8 billion set in October 2008, according to TrimTabs in Sausalito, California.

In the most-recent period, investors pulled $52.8 billion from bond mutual funds, typically owned by individuals, and $8.9 billion from exchange-traded funds, or ETFs, which both institutional and private investors buy. Equity funds shrank by $2 billion, bringing their total reduction to $386 billion over the past six years.


Investors often retreat to money-market mutual funds during times of financial stress, accepting lower yields compared with bonds in exchange for higher liquidity. Assets surged during the credit crisis to a peak of $3.92 trillion in January 2009, according to data from the Investment Company Institute. Money funds held $2.59 trillion in the week ended June 26, data from the Washington-based trade group show.

Money-fund yields averaged 0.04 percent this year, based on the Crane 100 Money Fund Index, with the yield for the week ended June 26 at 0.03 percent. U.S. equity mutual funds had assets of $6.61 trillion as of April, according to the most recent ICI data. Bond fund assets were $3.56 trillion.


The benchmark 10-year Treasury yield rose 11 basis points, or 0.11 percentage point, to 2.04 percent on May 22 after Bernanke, in response to questions from Congress during testimony, indicated the central bank had given thought to reducing its stimulus at some point. The yield then rose 17 basis on June 19, the biggest move since 2011, to 2.35 percent, after the central bank chief said at a news conference in Washington “it would be appropriate to moderate the monthly pace of purchases later this year.”

Treasury yields soared as high as 2.61 percent on June 25, the highest level since August 2011, before declining to 2.49 percent at the end of last week.

The yield rose five basis points to 2.53 percent as of 9:51 a.m. in London.

With coupons this low, bond investors are seeing little return on their money. Real yields on 10-year Treasuries, after subtracting the annual inflation rate, were 1.09 percentage points as of June 28, compared with the 6.4 percent aggregate earnings yield of U.S. stocks, according to Fed data compiled by Bloomberg. While the gap between inflation and 10-year yields is the most since March 2011, it is half the 2.2 percentage point average for the past 20 years.


An improving economy is dimming the lure of bonds as a haven. The Conference Board’s Consumer Confidence index rose to 81.4, exceeding all forecasts in a Bloomberg survey and the highest since January 2008, from a revised 74.3 in May, the New York-based private research group said June 25. Home prices have increased 12 percent since April 2012, according to the S&P/Case-Shiller Composite index.

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