BOND MARKET LIQUIDATION: Bond Funds Hit With Biggest Outflows Ever This Week

BofAML Global Research, EPFR Global

Apparently this was the week where the rush for the exits in the bond market really hit a crescendo.

In the week ended June 26, investors pulled a record $23.3 billion from bond funds. And it was a record across every type of fund: emerging markets, high yield, investment grade, and mortgage-backed securities funds all saw their largest weekly outflows ever.

Bond funds shrank by 0.9% this week, marking the second-largest weekly loss on record in terms of assets under management.

BofA Merrill Lynch Chief Investment Strategist Michael Hartnett calls it "bond market liquidation" in a note to clients.

Hartnett compares this week's outflows to the capitulation observed at the height of the financial crisis in October 2008.

After falling 2.1% over four weeks leading into the big outflow, Treasuries rallied 5.2% over the next six weeks.

The yield on the 10-year U.S. Treasury note hit a high of 2.64% on Monday, but the bonds have rallied this week, and the 10-year is now trading at 2.48%.

Below is a breakdown of this week's flows, via Hartnett:

Flows by Asset Class

Bonds: largest ever $23.3bn outflows! ($58bn over 4 weeks)

Equities: $13.1bn outflows ($6.4bn via ETF's and $6.7bn via LO funds)

Precious metals: $2.8bn outflows (20 straight weeks); MMF: $4.3bn inflows 

Flows by Fixed Income Sector

Largest ever outflows from EM debt funds ($5.6bn or 2.3% of AUM); intensity of EM debt redemptions now only exceeded by 2008 melt-down (Chart 3) 

Largest ever outflows from Munis ($4.5bn); Largest ever outflows from IG funds ($4.9bn);

Largest ever outflows from HY funds ($6.8bn); Largest ever outflows from MBS funds ($1.3bn);

53 straight weeks of inflows to leveraged loan funds ($1.1bn) 

Flows by Equity Region

$5.8bn outflows from EM equity funds, just shy of "hard" buy signal; But 4w outflows of 2.7% AUM is huge and argues a "soft" buy signal has been triggered for EM, especially in conjunction with our Global Breadth Rule. Last "soft" buy signal triggered in Feb'13, after which EEM bounced 10% over nxt 6w

Interestingly, Brazil sees first inflows in 18 weeks ($0.4bn)

$3.9bn outflows from US equity funds; modest $0.4bn outflows from Europe; $0.5bn inflows to Japan (now 23 straight weeks) 

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