September 17, 2013

Bond Fund Exodus Continues in September

Add another $20.3 billion to recent bond fund outflows

Oh, the humanity. A rough — some would say devastating — few months for bond funds and ETFs just got rougher.

No longer waiting until the end of the month to deliver the bad news, TrimTabs Investment Research reported on Tuesday that bond mutual funds and exchange-traded funds have redeemed $20.3 billion in September through last Friday. This month’s outflow is already the fifth-highest in any month on record.

“We’ve seen unprecedented redemptions from bond funds since the start of the summer,” David Santschi,  CEO of TrimTabs, said in statement.  “The outflow of $68.6 billion in June was the biggest ever, and the outflow of $37.4 billion in August was the third-biggest ever.”

In a research note, TrimTabs explained that bond funds have redeemed $138.4 billion since the start of June.  The year-to-date outflow of $28.4 billion reverses a tiny fraction of the inflows totaling $1.2 trillion from 2009 through 2012.

“The yield on the 10-year Treasury note has jumped 120 basis points since the end of April, which is an enormous move,” Santschi noted.  “We think the backup in yields has been driven partly by repayment of cheap European Central Bank loans that were used to buy Treasuries and partly by investor fears of ‘tapering’ by the Federal Reserve.”

TrimTabs argued that bond fund redemptions have been so large and so swift because retail investors commonly regard bond funds as safe.

“Many investors who loaded up on bonds in recent years didn’t fully understand the risks of what they were buying,” Santschi said.  “Now that they’re suffering losses in funds they thought were low risk, they want out fast.  The exodus suggests ‘tapering’ could be more disruptive than Wall Street thinks.”

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Check out Losers vs. Bigger Losers: Bond Lessons From the Summer Sell-Off on ThinkAdvisor.

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