May 4, 2018 / 11:01 AM / 6 months ago

Emerging market "tremors" after U.S. yield surge, small equity outflow- BAML data

LONDON, May 4 (Reuters) - A rise in U.S. 10-year bond yields above 3 percent for the first time in four years has triggered only small outflows from equity and bond funds so far, with a greater impact felt in emerging markets, Bank of America Merrill Lynch said on Friday.

Its weekly data, which tracks fund flows from Wednesday to Wednesday, showed investors pulled $84 million from equity funds, while bond funds shed $300 million even after U.S. Treasury yields crossed the key 3 percent milestone on April 24.

Ten-year yields are up some 53 basis points this year, against a backdrop of a strong economy, rising interest rates and bond issuance.

"Flows are gaffing around, dithering," BAML told clients.

BAML said the 3 percent level had not coincided with flows into so-called "higher yield" trades and in fact, the opposite had happened - "government bond funds are seeing record inflows, high inflows into tech and utilities funds...and outflows from financial sector funds".

It noted "tremors" in emerging markets given the rise in both U.S. government bond yields and the dollar, with emerging market debt funds posting two straight weeks of outflows for the first time since December 2016, to the sum of $1.2 billion.

However, equity markets have seen $30 billion in redemptions over the past seven weeks, BAML said, adding: "Markets are less euphoric".

While U.S. stocks saw small outflows of $300 million in the past week, European equity funds shed $1.1 billion - their eighth consecutive week of outflows.

In the past seven weeks, investors have unwound a third of inflows they had pumped into European equities over 15 months, as a strong euro has clipped company earnings and European Central bank stimulus failed to reduce credit spreads, BAML said, dubbing this a "cyclical capitulation."

Emerging equity funds, however, saw $900 million worth of inflows, marking an 11th straight week of inflows. (Reporting by Dhara Ranasinghe; Editing by Sujata Rao/Mark Heinrich)

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