Investors have pulled about US$60 billion from US bond funds since Federal Reserve Chairman Ben Bernanke rattled markets by outlining his plan to end the central bank’s unprecedented asset purchases.
The redemptions foreshadow what is in store for asset managers when the central bank eventually scales back the US$85 billion in monthly purchases of bonds and mortgage securities that investors have come to rely on. Bond funds had US$28.1 billion in net redemptions in the week ended June 26, the Washington-based Investment Company Institute (ICI) said on Wednesday.
Retail investors, who fled volatile stock markets to pour about US$1 trillion into the perceived safety of bond funds since the beginning of 2009, reversed that pattern in the past month in anticipation of rising rates. Casey, Quirk & Associates LLC, a consulting firm, in May warned that money managers that rely on bonds could face a difficult future as investors shift US$1 trillion away from traditional fixed-income strategies.
“The increase in rates has caused investors to reach the reality that bonds are not a one-way street, which is what fixed income has been for the most part over the past five to seven years,” Geoff Bobroff, a consultant based in East Greenwich, Rhode Island, said in a telephone interview.
Asset-management firms such as Bill Gross’ Pacific Investment Management Co (PIMCO) and Jeffrey Gundlach’s DoubleLine Capital LP have grown rapidly along with the rising popularity of bonds. DoubleLine, which was founded in December 2009, managed more than US$55 billion as of March 31, according to its Web site. PIMCO oversees US$2 trillion, double what it had in December 2009, company data show.
Casey Quirk, which did not mention specific managers by name, said firms specializing in bonds will have to diversify their revenue base while moving away from benchmark-oriented strategies to protect investors from losses.
“US fixed income managers must restructure as their business prospects are now threatened in the current environment and their clients are grossly underprepared to take losses in fixed income,” Yariv Itah, a partner at Darien, Connecticut-based Casey Quirk, said when the report was released.
The flight from bonds was triggered by Bernanke, who told Congress on May 22 the central bank may start reducing its bond purchases. Bernanke told reporters on June 19 that policy makers may start decreasing the Fed’s asset purchases later this year and end them by the middle of next year if the economy meets expectations.
“If interest rates continue to rise we would expect outflows from bond funds to continue,” Brian Reid, the ICI’s chief economist, said in a telephone interview.
Last week’s withdrawals were the biggest since the trade group started tracking weekly numbers in January 2007. The redemptions over the past four weeks, according to preliminary estimates, represent about 1.7 percent of the US$3.5 trillion held in fixed-income mutual funds. Taxable bond funds had redemptions of US$20.4 billion and municipal bond funds saw US$7.68 billion pulled in the week ended June 26, ICI’s data show.
Bonds of all types have generated losses in recent weeks. Treasuries lost 2.1 percent from May 21 through Tuesday, according to Bank of America Merrill Lynch indexes. High-yield bonds lost 3.5 percent and US corporate bonds lost 3.8 percent over the same period.
Gross’ PIMCO Total Return Fund, the world’s largest mutual fund, absorbed a record US$9.9 billion in net redemptions last month. Gross underperformed rivals during the bond selloff, taking losses on his holdings of Treasuries and inflation-linked Treasuries, which fell 5.5 percent since May 21, Merrill Lynch indices show.
Gross’ fund lost 2.4 percent over the past month, worse than 92 percent of rivals, according to data compiled by Bloomberg.