Investor bond retreat the fastest pace in 2 years

DES MOINES, Iowa (AP) — Investors retreated from bond mutual funds last week at the highest level in two years, resulting in a net outflow of $8.62 billion in the week ended Dec. 15, the Investment Company Institute said Wednesday.

That’s the largest single-week pullback from bonds since the week ending Oct. 15, 2008, when investors took out $17.60 billion.

The trend is driven mostly by an uptick in interest rates, which drives bond prices down.

“The pullback in demand from bonds happens when bond prices start to go down, they look a lot less attractive particularly since stocks have been going up a little,” said Loren Fox, senior research analyst at New York-based Strategic Insight, a mutual fund industry consultant.

In addition, some investors take profits at the end of the year and rebalance their portfolios, prompting some sell-off, he said.

Bond outflows are expected in times of rising interest rates, but ICI Chief Economist Brian Reid said he expects demographic changes to keep the migration from bonds from reaching extremes.

“We have a much larger portion of mutual fund investors who are over 65 now. Individuals over 65 tend to hold a larger portion of their investment portfolios in fixed income securities,” he said.

While bond flows are likely to be negative in the short term, the large near-retirement baby boomer population likely will mitigate some of the outflows we might have seen otherwise, he said.

Last week marked the fourth time in the last five weeks that bond flows were negative. They edged up $390 million during the week ending Dec.1 but were negative the week ending Dec. 8 as $1.66 billion was pulled out.

The four-week moving average, which smooths volatility, remains negative for the third week in a row at $2.94 billion. Prior to December, that average had been positive the entire year.

Taxable bond mutual funds saw net outflows for the second consecutive week as $3.77 billion was pulled out.

Last week, when $403 million was pulled from taxable bond funds, marked the first week of outflows since Dec. 10, 2008.

The report shows an increased confidence in stocks, which is no surprise since the SP 500 stock index has gained 16 percent since Sept. 1.

Foreign stock funds, which have seen inflows weekly since the second week of September, continued their attraction, pulling in $2.24 billion for the week. U.S. stock funds had an estimated outflow of $2.40 billion.

ICI calculates flow estimates from data collected from 95 percent of the industry’s assets.

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