Investors have pulled about $60 billion from U.S. bond funds since Federal Reserve Chairman Ben S. Bernanke rattled markets by outlining his plan to end the central bank’s unprecedented asset purchases.
The redemptions foreshadow what’s in store for asset managers when the central bank eventually scales back the $85 billion in monthly purchases of bonds and mortgage securities that investors have come to rely on. Bond funds had $28.1 billion in net redemptions in the week ended June 26, the Washington-based Investment Company Institute said.
Retail investors, who fled volatile stock markets to pour about $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 $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’s Pacific Investment Management Co. 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 $55 billion as of March 31, according to its website.
Pimco oversees $2 trillion, double what it had in December 2009, company data show.
Casey Quirk, which didn’t 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.
“U.S. 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 that the U.S. central bank may start reducing its bond purchases. Bernanke told reporters June 19 that policy makers may start decreasing the Fed’s asset purchases later this year and end them by mid-2014 if the economy meets expectations.
Since May 21, the yield on the 10-year U.S. Treasury note has climbed to 2.5 percent from 1.93 percent, according to data compiled by Bloomberg.
“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 $3.5 trillion held in fixed-income mutual funds. Taxable bond funds had redemptions of $20.4 billion and municipal bond funds saw $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 July 2, according to Bank of America Merrill Lynch indexes. High-yield bonds lost 3.5 percent and U.S. corporate bonds lost 3.8 percent over the same period.
U.S. investors are not accustomed to losing money in bonds. The last time bond funds had negative returns was in 2008, when on average, they lost 7.8 percent, according to data compiled by Chicago-based Morningstar Inc. Stock funds that year fell an average of 41 percent. After averaging gains of at least 6 percent every year since 2009, bond funds lost 2.2 percent in the first half of 2013.
Gross’s Pimco Total Return Fund, the world’s largest mutual fund, absorbed a record $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 indexes show.
Gross’s fund lost 2.4 percent over the past month, worse than 92 percent of rivals, according to data compiled by Bloomberg.
Gross and other bond managers say the worst is over for bonds. In a Bloomberg Radio interview with Tom Keene June 27, Gross said yields on the 10-year notes can go lower, which would help reverse some of the losses in May and June.
“There’s profits to be made in the bond market between now and the end of the year,” Gundlach, founder of Los Angeles- based DoubleLine Capital, said in a June 27 webcast for investors.
Gundlach’s $39 billion DoubleLine Total Return Bond Fund lost 0.3 percent this year, better than 83 percent of rivals. Gundlach has avoided inflation-linked Treasuries, calling them a “trap” and a “disaster.”
–With assistance from Christian Baumgaertel in Boston. Editors: Sree Vidya Bhaktavatsalam, Christian Baumgaertel