Rotation Out of High-Grade Bonds Triggered, Bank of America Says

Ten-year Treasury yields breaching 2.5 percent signaled the beginning of a wave of outflows from high-grade bond funds, according to Bank of America Corp.’s Hans Mikkelsen.

“Interest rates simply rose too fast, and for now we think the rotation out of bond funds will contribute more spread widening,” analysts led by Mikkelsen wrote yesterday in a report. If yields continue to increase, “we could see massive outflows from high-grade bond funds and a much more disorderly rotation with significantly wider credit spreads. This scenario remains clearly the biggest risk to high grade this year.”