Bond Funds Post Record $80 Billion in Redemptions in 2013

Dec 31, 2013 5:07 pm ET

(Updates with growth forecasts in fifth paragraph.)

Dec. 31 (Bloomberg) -- Bond mutual funds in the U.S. posted record investor withdrawals of $80 billion this year as investors fled fixed income in anticipation that interest rates will rise further.

The redemptions, which were through Dec. 23, represented 2.3 percent of bond-fund assets, Brian Reid, chief economist at Washington-based Investment Company Institute, said today in a telephone interview. The previous annual record for redemptions from bond funds was in 1994, when investors pulled about $62 billion in the full year, or 10 percent of assets, as interest rates rose, according to ICI.

Bond funds had attracted money in the early part of this year until May, when Federal Reserve Chairman Ben S. Bernanke indicated the central bank might start reducing its monthly asset purchases. Since then, investors have pulled about $175 billion, or about 5 percent of assets, from bond mutual funds, according to ICI estimates. The Fed said Dec. 18 that it would cut stimulus by $10 billion next month, to $75 billion from $85 billion.

“As long as interest rates are rising we would expect to see continued moderate outflows,” Reid said. “It’s been pretty consistent with what we’ve seen overall.”

Higher Yields

Yields in the six major government bond markets from the U.S. to Germany and Japan are forecast to rise in 2014 with world economic growth accelerating to 2.8 percent from 2 percent this year, according to Bloomberg surveys of economists. Investors in bond mutual funds can suffer losses as interest rates climb, depressing the prices of the securities.

In anticipation that the three-decade rally in bonds may be ending, investors pulled money from Bill Gross’s Pimco Total Return Fund to Jeffrey Gundlach’s DoubleLine Total Return Bond Fund after the Fed signaled its tapering plans.

As investors retreated from bonds, they returned to stocks. Exchange-traded and mutual funds that invest in U.S equities took in about $162 billion in 2013, the most since 2000, according to data compiled by Bloomberg and the ICI. The Standard & Poor’s 500 Index of stocks gained 30 percent this year.

The amount redeemed from bond mutual funds in 2013 isn’t close to the $1.1 trillion people poured into the investments from the beginning of 2009, amid the financial crisis, until May, Reid said.

--With assistance from Whitney Kisling in New York. Editors: Josh Friedman, Sree Vidya Bhaktavatsalam