Fears that the United States Federal Reserve will end its quantitative easing programme by reducing its bond purchases prompted the highest weekly outflow from bond funds on record.
Some $12.5 billion (€9.5 billion) flowed out of bond funds tracked by US data provider EPFR Global in the week ending June 5, including $6 billion from high-yield bond funds.
However, economists say the latest US employment report, which shows moderate but not strong growth of 175,000 payrolls in May, suggests the Fed will continue its stimulus measures for some time yet — providing some reassurance to the markets.
Schroders' chief economist, Keith Wade, says the current data points to an economy achieving modest growth, but not making inroads into unemployment. The Fed will need to see regular payroll gains of 200,000 a month before it decides to start tapering bond purchases, he says.
The latest employment report “strengthens our conviction that we will have to wait until the second quarter of next year before the Fed starts to take its foot off the gas”, adds Wade.
Bond investors appear nervous because the end of the Fed's bond-buying policy is expected to cause bond yields to rise, a worrying prospect given that yields are at very low levels.
“Bond markets are extra sensitive to the prospect of tapering monetary stimulus, because investors naturally have a much lower tolerance for higher yields at these ultra low levels,” says Ian Spreadbury, manager of the Fidelity MoneyBuilder Income and Fidelity Strategic Bond funds.
Spreadbury says the recent moves in the bond market highlight a lack of hiding places for investors seeking to avoid volatility.
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