Bear Market in Bonds, but not "Armageddon"

As investors run from bond funds, fixed-income managers scramble to stanch the flow.

Investors who poured $1.26 trillion into bond funds in the past six years pulled out record amounts of cash last month, leaving the world’s biggest fixed-income managers struggling to stem the flow.

The funds saw $61.7 billion of withdrawals as money market mutual fund assets rose $8.17 billion in the week ended June 25, according to TrimTabs Investment Research and the Money Fund Report. Bank of America Merrill Lynch’s Global Broad Market Index dropped 2.9 percent in the past two months, the most since the inception of the daily gauge in 1996, as Federal Reserve Chairman Ben S. Bernanke laid out possibilities for reducing the $85 billion in monthly bond purchases supporting the economy.

Low Returns

With coupons this low, bond investors are seeing little return on their money. Real yields on 10-year Treasuries, after subtracting the annual inflation rate, are 1.08 percentage points, compared with the 6.4 percent aggregate earnings yield of U.S. stocks, according to Fed data compiled by Bloomberg. While the gap between inflation and 10-year yields is the most since March 2011, it is half the 2.2 percentage point average for the past 20 years.

Buying Opportunity

U.S. gross domestic product expanded at a revised 1.8 percent annualized rate from January through March, down from a prior estimate of 2.4 percent, the Commerce Department said June 26. The economy will grow 1.9 percent for 2013, according to the median forecast of 86 economists in a Bloomberg News survey in June, down from last year’s 2.2 percent increase.

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