Surge of money from bonds could stifle lending

[Elmore Furth]

Source: Associated Press

Americans are leaving bond mutual funds at the fastest rate in more than two years.

U.S. investors pulled $8.6 billion out of bond funds in the week ended Dec. 15, the largest withdrawal since October 2008 when financial markets were in free-fall. They pulled an average of almost $3 billion every week since Nov. 23, according to the Investment Company Institute. Prior to November, money had been flowing into bond funds every week for nearly two years.

"This is the real deal," says Marilyn Cohen, founder of Envision Capital Management, which oversees $300 million in mostly fixed-income investments.

If she's right, the end of cheap credit is near. Interest rates would rise, which would ripple through the economy. It would become more expensive for cities, states and companies to borrow money to build schools, roads and expand their businesses. It would also cause the value of bond funds to fall, blindsiding Americans who thought they'd stashed their retirement savings in an investment that wouldn't sink.



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Investors are retreating from bond funds after signs of an economic recovery and a stock market increased speculation that interest rates may rise. Investors are retreating from bond funds after signs of an economic recovery and a stock market rally increased speculation that interest rates may rise.

Speculation about municipal bond defaults didn't help either. Investors cashed out a net $4.85 billion from muni funds in the seven days ended Dec. 15, up from $1.26 billion the previous week, the Investment Company Institute said in a report Wednesday.

Guess where that money is coming from that is driving gasoline price futures up?

[Roy Rolling]

1. The Last Straw

The tax deal that added $900 billion to the deficit is the proverbial "straw that broke he camel's back." Republicans are clueless, but their handlers---Wall Street---know the damage of the deal. Interest rates will rise, bond prices will fall or collapse, as the weight of the tax cuts may collapse the credit markets----again.

[Skink]

2. Just imagine 1 percent interest rates.

investers have become wuses.

[geckosfeet]

3. I believe that this is simply a cyclical movement of cash from bonds to equities.

It's not that there is anything wrong with bonds per say. But if there is more money to be made from equities that's where investors will invest.

After all, the only reason investors are in bonds now is because the stock market tanked and bonds were safer. The fact that they are getting out of bonds means that they see equities, and the stock market picking up - at least for the near term.

And remember people, it is the tax payer who is on the hook for municipal, state and federal bonds. No matter who owns them, we pay the premium when they are redeemed.

[customerserviceguy]

4. It's not that there's necessarily more money to be made in equities

but with interest rates have only one possible direction to go, bond funds are going to take awful losses in the next several years. Clearly, the smart rats know when to leave the sinking ship, and I got my money into short-term money market funds months ago. I wouldn't be terribly surprised if that is where a lot of the flight is going to, as MMF's will benefit from the coming increase in rates.

As for muni bonds, the rising rates don't impact already issued securities, in fact, the governments that issued them will be OK, they won't even have to go through the hassle of calling bonds, like they do when interest rates are dropping. But the rise in rates will affect the cost of future borrowing, and will put a crimp on the part of the economy that is powered by government spending.

[Frank Booth]

5. I started selling bond funds a couple months ago,

once the predictions of a coming bond crash became pervasive. Like any other investment, it's a self-perpetuating cycle.

[w4rma]

6. As long as 'free' trade is in effect and as long as the gap between the wealthy and poor widens...

There is *nothing* cyclical about this economy.

[geckosfeet]

7. That gap is certainly a sad fact about the direction of our economy.

But the cycle of money from bonds to other investment instruments and eventually back to bonds is indeed quasi-cyclical in nature. Bonds are a recognized safe haven in times of economic uncertainty. Investors somehow see sovereign debt as more secure than corporate equities.