(Reuters) – Investors in funds based in the United States put $4.57 billion into taxable bond funds in the latest week, the most since early May, on further reassurance that the Federal Reserve is flexible on the timing for ending its stimulus, data from Thomson Reuters’ Lipper service showed on Thursday.
High-yield junk bond funds posted $3.28 billion in inflows in the week ended July 24, the highest since October 2011. Funds that hold floating-rate bank loans, meanwhile, gained $1.85 billion in new cash, the biggest weekly inflow since Lipper started tracking the funds in August 2003.
“Bernanke eased investors’ fears,” said Tom Roseen, head of research services at Lipper. Fed Chairman Ben Bernanke reiterated on July 18 that the U.S. central bank would only start reducing its bond-buying stimulus once the economy appeared strong enough.
The latest inflows into taxable bond funds were the biggest since the week ended May 8 and showed a modest recovery in demand. Appetite for bond funds was hit when Bernanke told Congress on May 22 that the Fed could reduce its stimulus later this year if the U.S. economy looked strong enough.
The Fed is buying $85 billion in Treasuries and agency mortgage securities monthly in an effort to spur hiring and lower long-term borrowing costs. The Fed’s stimulus has been a major source of support for both stock and bond markets.
Bernanke’s comments in late May triggered a selloff in the bond market and led investors to pull $51.5 billion out of taxable bond funds in June. The yield on the benchmark 10-year Treasury note has risen 96 basis points to 2.58 percent since May 2. As yields rise, prices fall.
Even as Bernanke reassured investors that the Fed will remain focused on the strength of the U.S. economy before reducing its stimulus, the same investors sought floating-rate loan funds in anticipation that interest rates will eventually rise, said Roseen of Lipper.
Floating-rate loans, also known as leveraged loans, are protected from rising interest rates by being pegged to floating-rate benchmarks.
Funds that hold inflation-protected securities, including Treasury Inflation-Protected Securities, or TIPS, suffered outflows of $308.6 million over the week. That marked the 15th straight week of outflows as many investors have said that there are no signs of looming inflation.
Municipal bond funds also suffered $1.23 billion in outflows, down from the previous week but still marking the ninth straight week of outflows from the funds. The city of Detroit filed for bankruptcy on July 18, the largest municipal bankruptcy filing in U.S. history.
Stock funds, meanwhile, attracted $5.37 billion in new cash during the week, down from inflows of $16.64 billion the previous week. Stock mutual funds attracted $3.32 billion, while stock exchange-traded funds gained $2.05 billion.
ETFs are generally believed to represent the investment behavior of institutional investors, while mutual funds are thought to represent the retail investor.
The demand for stock funds, albeit less than the prior week, came as the benchmark S&P; 500 index notched record closing highs for three sessions over the reporting period. U.S. stocks in the week were boosted by better-than-expected corporate earnings and positive U.S. economic data.
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Still, the S&P; 500 rose just 0.3 percent over the weekly period as lukewarm-to-poor earnings from companies such as Caterpillar and AT&T; offset strong earnings from others such as Apple and Morgan Stanley.
As the performance of U.S. stocks wavered, investors pulled $1.26 billion out of the SPDR S&P; 500 ETF Trust, marking the biggest weekly outflow among all stock ETFs. Investors gave $372 million to the iShares: Russell 2000 Index Fund, however, which tracks smaller-capitalized U.S. stocks.
Roseen of Lipper said that investors – mainly savvier institutional investors – sought to gain higher returns through the growth benefits of small-cap stocks over the week.
Funds that hold Japanese stocks gained $769.1 million in new cash, more than double the previous week’s inflows of $309.7 million and marking the biggest inflows into the funds since the week ended May 22.
Japan’s Nikkei average rose 80 basis points over the reporting period following Japanese Prime Minister Shinzo Abe’s upper house election win. Under Abe, the Bank of Japan announced on April 4 that it would inject about $1.4 trillion into the Japanese economy in less than two years to fight deflation.
The latest inflows into Japanese equity funds were a vote of confidence in the Japanese prime minister’s stimulus plans, said Roseen of Lipper.
Investors pulled $12.68 billion out of money market funds, which are low-risk vehicles that invest in short-term securities, marking the first outflows from the funds in five weeks. Roseen said the outflows indicated that investors aimed to put money back to work in stocks and riskier bonds.
The weekly Lipper fund flow data is compiled from reports issued by U.S.-domiciled mutual funds and exchange-traded funds.
(Reporting by Sam Forgione; editing by Phil Berlowitz, G Crosse and Jim Loney)