Bond Mutual Funds Headed for Record Withdrawals This Year

Bond mutual funds are headed for record redemptions in 2013 amid signals the U.S. Federal Reserve will reduce its stimulus.

Investors have removed $70.7 billion so far this year from bond funds, TrimTabs Investment Research said today in an e-mailed statement. Unless the trend reverses, the redemptions would surpass a record $62.5 billion that investors removed from bond mutual funds in 1994, according to TrimTabs.

Investors have been pulling money from bond funds since May, when Federal Reserve Chairman Ben S. Bernanke first hinted that the central bank might begin scaling back its unprecedented asset purchases. The yield on the 10-year Treasury note is 2.8 percent, up from 1.93 percent on May 21, the day before Bernanke spoke about the possibility of tapering its stimulus.

“The ‘taper talk’ that started in May proved to be a huge inflection point for the credit markets,” David Santschi, chief executive officer of TrimTabs, said in today’s statement, which didn’t provide details of redemptions across various categories within fixed income.

Bill Gross’s Pimco Total Return Bond Fund (PTTRX), which lost its title as the world’s largest mutual fund in October, had its seventh straight month of withdrawals in November as investors continued to flee bonds. The $244 billion fund suffered $36.9 billion in estimated redemptions in the first 11 months of the year, according to Chicago-based Morningstar Inc.

Different Categories

The flight from bond funds has not affected all categories of fixed-income equally. Intermediate-term bond funds, the most popular category in fixed-income, experienced $63.4 billion in withdrawals through October, Morningstar data show. Municipal bond funds saw redemptions of $43.9 billion as investors reacted to a spate of bad news, including the bankruptcy of Detroit and the fiscal woes of Puerto Rico.

Non-traditional bond funds, which have the flexibility to put money into a wide range of investments, attracted $48 billion in the same 10-month period, while funds that buy bank loans, whose interest adjusts higher as rates climb, gathered $57.7 billion, Morningstar data show.

“There is a suggestion that the managers of these funds will outfox the rising rate environment,” Eric Jacobson, a Morningstar analyst, said in a telephone interview.

Corporate bonds globally from the riskiest to most-creditworthy are gaining 1.4 percent this year, poised for the lowest annual returns since the financial crisis in 2008, according to Bank of America Merrill Lynch index data.

Losing Value

Investment-grade bonds, which are losing value this year for the first time since the credit seizure, will likely continue declining in 2014, according to projections from UBS AG and Citigroup Inc. analysts. JPMorgan Chase & Co. analysts forecast that high-yield bonds are poised to return 5 percent next year after posting average annual returns of 18.8 percent since 2008.

Adjusted for the amount of money in bond funds, this year’s exodus from fixed-income funds is smaller in percentage terms than the redemptions in 1994. The withdrawals in 2013 amount to about 2.1 percent of the money that was in bond funds at the beginning of the year, according to data from the Investment Company Institute, a Washington-based trade group. In 1994, redemptions equaled 10 percent of the total.

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.