Bond Fund Investors Pull Most Money in 2 Years as Interest Rates May Rise

Bond mutual funds had the biggest client withdrawals in more than two years last week as a flight from fixed-income investments accelerated.

U.S. bond funds experienced withdrawals of $8.62 billion in the week ended Dec. 15, up from $1.66 billion the week before, according to a release from the Investment Company Institute, a Washington-based trade group. Last week’s withdrawals were the largest since the week ended Oct. 15, 2008, when investors yanked $17.6 billion from bond funds.

Investors are retreating from bond funds after signs of an economic recovery and a stock market rally increased speculation that interest rates may rise. The selloff in Treasuries accelerated after the Federal Reserve last month pledged to buy $600 billion in assets to revive the economy. The 10-year note yields 3.35 percent, up from 2.49 percent Nov. 4, according to data compiled by Bloomberg.

Most of the money was probably pulled by institutional investors looking to lock in higher yields by buying bonds directly, rather than through funds, said Geoff Bobroff, a consultant based in East Greenwich, Rhode Island. (more)