Equities unloved; bumper debt flows raise ‘bond shock’ risk: BAML

By Sujata Rao

LONDON (Reuters) – Global bond funds pulled in more fresh money in the past week, though appetite for emerging assets stuttered and European stocks extended their outflow streak to a record 29th week, Bank of America Merrill Lynch data showed on Friday.

World stocks have retreated for two straight weeks <.MIWD00000PUS> and markets are on tenterhooks ahead of a Friday speech by U.S. Federal Reserve chair Janet Yellen at a central bankers’ gathering in Jackson Hole, where she could offer hints about when the Fed could next raise interest rates.

With a December rate rise now seen as likely and economic growth remaining anaemic across much of the globe, equities and emerging markets have stuttered, with the former seeing the first fund outflows in three weeks, shedding $4.2 billion, BAML data showed.

Bond markets were on a roll, however, with investors more or less in agreement that interest rates in the developed world will remain at record low levels a while yet, despite any upcoming Fed move. German Bunds and Treasuries have returned about 8 percent this year, while emerging debt has provided double-digit gains.

“Bond shock remains key autumn risk given euphoric flows to assets tied to zero-rate expectations,” BAML said in its note, which was entitled: “Not so fast Mr Bond.”

BAML said bond funds had received $6.6 billion, having taken in new money during 19 of the past 21 weeks. While government bond funds saw outflows for the seventh straight week, municipal bond funds and investment grade debt were gainers, the latter receiving $3.9 billion.

Emerging debt absorbed $900 million but this was the weakest inflow in eight weeks, the report said.

Among the equity funds, European stocks were the most unloved category, losing money for a record 29th week, shedding $2 billion. U.S. equity funds too saw outflows of $4.4 billion, their largest in eight weeks.

There were signs of jitters over emerging equities, where the MSCI index is set to snap a six-week long winning streak <.MSCIEF>. The asset class absorbed new money for the eighth straight week but inflows dwindled to just $30 million, BAML said, versus $5 billion-plus the previous week.

Year-to-date equity funds have seen outflows of around $132 billion while global bonds have received $144 billion and money-market funds have shed $56 billion, the BAML report said.

(Reporting by Sujata Rao; editing by Ralph Boulton)