October 4, 2018 / 10:59 PM / 8 months ago

UPDATE 1-Investors pull most cash from U.S. Treasury funds since March 2016 -Lipper

 (Adds data on funds, analyst quote, table, byline)
    By Trevor Hunnicutt
    NEW YORK, Oct 4 (Reuters) - Investors dumped U.S. government
debt funds during the latest week, Lipper data showed on
Thursday, pulling the most cash from those funds since March
2016 and exacerbating a bond selloff that spooked markets.
    Nearly $1.7 billion hemorrhaged out of U.S.-based mutual
funds and exchange-traded funds (ETFs) invested primarily in
Treasury bonds during the seven-day period through Oct. 3,
according to the Refinitiv research service.
    Bond investors are growing restless as signs of inflation
build and the U.S. Federal Reserve sticks to its plan of
containing prices by hiking interest rates.
    "The Street fears they might accelerate the interest rate
program that they're on right now," said Pat Keon, senior
research analyst at Lipper.
    With potentially inflationary U.S. tariffs already taking
effect, data on Wednesday showed U.S. service sector activity
hit a 21-year high and ADP private payrolls data for September
was also strong. Monthly U.S. jobs data is due on Friday.

    U.S. benchmark 10-year Treasury note yields leapt to their
highest since May 2011.
    Fund investors were quick to adjust, raising stakes in
lower-grade corporate credit. Those bonds are expected to hold
up better than government debt when rates are rising, as long as
the economy keeps growing. High-yield bond funds attracted $1.4
billion during the week, the most since July, Lipper said.
    Oil prices, meanwhile, are more than $10 higher than they
were at the beginning of the year, another sign of the price
pressures building but also a help to energy companies that have
issued debt in recent years to bring that crude to market. U.S.
benchmark oil futures settled at $74.33 per barrel on
Thursday, up from around $60 in January.
    Inflation-protected bond funds posted $544 million in
withdrawals, the most in any week since June 2013, suggesting
some fund investors are focused more on rising rates than
inflation. These types of bonds only protect against the latter.
    Stock fund investors repositioned on the move in rates, too.
    Real estate funds recorded $700 million of withdrawals, the
most since June, according to Lipper. The sector depends on debt
financing that becomes more expensive when rates rise. 
    And investors pulled $1.7 billion from bank sector funds,
the most since January 2015. Higher rates help banks, but only
when there is enough of a gap between short- and long-term
lending rates from which they can profit. Healthcare and
Japanese stocks drew more cash in the latest week.
    The following is a breakdown of the flows for the week,
including mutual funds and ETFs:
 Sector                    Flow Chg  Pct of    Assets     Count
                           ($ blns)  Assets    ($ blns)   
 All Equity Funds          1.530     0.02      7,508.734  12,205
 Domestic Equities         2.138     0.04      5,377.681  8,670
 Non-Domestic Equities     -0.609    -0.03     2,131.053  3,535
 All Taxable Bond Funds    -0.235    -0.01     2,792.736  6,040
 All Money Market Funds    -10.056   -0.37     2,703.043  1,032
 All Municipal Bond Funds  -0.044    -0.01     427.740    1,432
 (Reporting by Trevor Hunnicutt; Editing by Jennifer Ablan and
Rosalba O'Brien)
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