Bond Fund Flows Beat Stocks for First Week in 10, Citigroup Says

Bond funds lured more weekly inflows than stocks for the first time in 10 weeks as investors sold U.S. equities before possible budget cuts in the world’s largest economy, according to Citigroup Inc.

Bond funds attracted a net $2.6 billion in the week to Feb. 13, while stocks drew $1.8 billion, Citigroup analysts Markus Rosgen and Yue Hin Pong said in a report today, citing data from research company EPFR Global. U.S. equity funds had net outflows of $3.7 billion, according to the note.

Investors favored less risky assets during the week as U.S. Senate Democrats proposed a 10-month delay in $1.2 trillion of automatic spending cuts for defense and domestic programs set to begin March 1. The Democrats’ $110 billion plan would replace across-the-board reductions by making defense spending cuts, ending direct payments to farmers, and requiring top earners to pay a minimum 30 percent income tax rate.

“If the automatic budget cut in U.S. isn’t avoided in two weeks’ time, it could hurt various functions of U.S. agencies,” Pong wrote in an e-mail today. “It would also signal that political agreement is harder to come by.”

The March 1 deadline marks another fiscal showdown between President Barack Obama and congressional Republicans over whether efforts to reduce the budget deficit should include revenue or be limited to spending. Unless Congress acts, $1.2 trillion in spending cuts, known as sequestration, will take effect over nine years, which could hurt economic growth.

Asian equity funds attracted $535 million, a 23rd week of inflows, slowing from $981 million last week as markets shut for the Lunar New Year holidays. Shanghai and Vietnam markets are closed for an entire week from Feb. 11, while Japan, South Korea, Malaysia, Hong Kong and Singapore were closed for between one and three days. Taiwan is closed for seven days.

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