U.S. fund investors compound pain for bond markets

[December 13, 2018]  By Trevor Hunnicutt

NEW YORK (Reuters) - U.S. fund investors sold more bonds in December's opening days, the Investment Company Institute (ICI) said on Wednesday, putting even more of a chill on markets where companies and governments borrow.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., December 11, 2018. REUTERS/Brendan McDermid

Investors cashed out $5.2 billion from U.S.-based bond mutual funds and exchange-traded funds (ETFs) during the week ended Dec. 4, ICI said, intensifying what is already the worst sales of such investments since the 2008 financial crisis as markets fret about a U.S. economic slowdown.

Nearly $65 billion has dropped out of U.S.-based bond funds since October, marking the worst calendar quarter since the financial crisis, when investors cashed in $68 billion of debt-fund shares, according to Lipper, a research service.

The Federal Reserve is widely expected next week to raise its target interest rate for a ninth time in about three years. But the central bank's efforts to restore normal policy a decade after it responded to financial crisis by pushing rates near zero has irked markets.

In addition to the rate hikes, investors have been worried about excessive corporate borrowing, rising short-term bond yields, U.S.-China trade tensions and slowing growth in corporate profits. The benchmark S&P 500 stock index is down more than 8 percent, including reinvested dividends, over the past three months.

"While economic growth is slowing and earnings growth is expected to decelerate, we do not see either an economic or an earnings recession over the next 12 months," said Charles Shriver, co-head of the Asset Allocation Committee at T. Rowe Price Group Inc. "There's certainly elevated uncertainty, but I think that it's important to look at the fundamentals and what we think is the trajectory for earnings."

The pullback in stocks has actually helped safe-haven bond performance, but closely watched bond investor Jeffrey Gundlach said on Tuesday that bonds' rally over the past few weeks has been unimpressive because of the unfavorable mix of rising U.S. government debt and rates.

(Reporting by Trevor Hunnicutt; editing by Jonathan Oatis)

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