Bond Investors Struggle With Recent Losses

As U.S. stocks continue their recent rally, the bond markets gave up ground in May and so far in June.  U.S. bond funds suffered their second-worst withdrawals last week in more than two decades after speculation about an eventual end to the Federal Reserve’s bond purchases sent fixed-income markets lower.

Investors pulled $9.1 billion from fixed-income mutual funds and exchange-traded funds in the week ended June 5, Denver-based Lipper said yesterday in an e-mailed statement. That’s the second-biggest redemptions for a week since the company started tracking the data in 1992. Corporate high-yield funds saw redemptions of $3.2 billion, Lipper said, the largest weekly withdrawal on record.

While retail investors have favored the perceived safety of bond funds over equity funds since the financial crisis, money managers and analysts have been predicting a reversal as interest rates near zero would eventually rise and send bond prices lower. Global bond markets posted their biggest monthly losses in nine years in May, as the more than $40 trillion of bonds in the Bank of America Merrill Lynch Global Broad Market Index fell 1.5 percent on average.

Market ‘Disarray’

Federal Reserve Chairman Ben S. Bernanke told Congress on May 22 that the central bank’s policy-setting board could start scaling back its bond purchases in its “next few meetings,” if the U.S. employment outlook shows sustained improvement.

Economists polled by Bloomberg this week predicted the Fed will trim its so-called quantitative easing program to $65 billion a month at the Oct. 29-30 meeting of the Federal Open Market Committee, from the current level of $85 billion.

‘Keeps Going’

“Every year for the past four years, people have said the bond trade is over and yet it keeps going,” Lee Spelman, head of U.S. equity client portfolio managers at New York-based JP Morgan Asset Management, said in an interview last month.

Economists surveyed by Bloomberg expect U.S. rates to rise over the next four quarters.

Jeffrey Gundlach disagrees. The manager of the $41 billion DoubleLine Total Return Fund, said this week that while rates may move higher in the near-term, he expects the yield on the 10-year U.S. Treasury note to drop to 1.7 percent by the end of the year. It closed yesterday at 2.08 percent, according to data compiled by Bloomberg.  “It’s a horrible time to be exiting bonds,” Gundlach said.

Meanwhile, Loomis Sayles & Co. is buying 30-year Treasury bonds on a bet that the Federal Reserve will continue printing money, according to money manager, Matt Eagan.  The Fed’s bond-buying plan “will be around longer than the market thought,” Eagan, who is co-portfolio manager of the Loomis Sayles Strategic Alpha Fund and Strategic Income Fund, told reporters in London today. “The economy is not strong enough despite the recovery. The market is getting ahead of itself. Even if the Fed starts to taper, they will still be injecting liquidity into the market.”

Source: Bloomberg News