U.S. fund investors sold most bonds in seven weeks on Fed hike: ICI

By Trevor Hunnicutt

NEW YORK (Reuters) – U.S. fund investors battered bond markets with the biggest withdrawals in seven weeks and snatched the most cash from foreign stocks since mid-2015 as the Federal Reserve hiked interest rates, Investment Company Institute (ICI) data showed on Wednesday.

Some $12.2 billion tumbled from U.S.-based bond funds during the week ended Dec. 19, the trade group said, as the Fed raised its target interest rate for a ninth time in about three years.

While the rate hike was telegraphed in advance and was accompanied by projections of fewer rate hikes next year, investors did not like the tone struck by Fed Chairman Jerome Powell in a news conference where he said policymakers would continue trimming their bond holdings by $50 billion each month, an initiative he described accurately as on autopilot but more debatably characterized as smooth.

The Fed’s shrinking balance sheet, combined with elevated U.S. government deficit spending, have pumped more bonds into markets that may be growing less willing to sop up the excess.

At the same time, investors are growing more cautious over spillover risks in the equity market, too. ICI said “world” stock funds primarily invested abroad recorded $7.2 billion in withdrawals, marking a fourth straight week of withdrawals and the most cash pulled since August 2015.

In addition to the rate hikes, investors have been worried about excessive corporate borrowing, U.S.-China trade tensions and the potential for slowing economic growth.

Overall, stock funds recorded $9.6 billion in withdrawals for a second straight week in the red. More than $56 billion left mutual funds during the week, while ETFs attracted $25 billion, accelerating a rotation to the typically lower-fee product. The data does not include money market funds where investors park cash.

“Even as markets continue through a period of volatility, fund shareholders remain committed to saving for the long term,” said ICI Chief Economist Sean Collins in a statement. Collins added that the withdrawals represent a fraction of a percent of overall mutual fund assets. “This is consistent with the steady investment behavior we have witnessed from fund shareholders for decades and reinforces some investors view periods of volatility as a buying opportunity,” he said.

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