Record Selling of Bond Funds: $79.8 Billion Pulled from Bond Mutual Funds and Exchange-Traded Funds

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July 5, 2013

Record Selling of Bond Funds: $79.8 Billion Pulled from Bond Mutual Funds and Exchange-Traded Funds.

The biggest liquidity story is unfolding in the bond market, not the stock market. Investors are pulling record sums out of bond funds.Read this investor insight by TrimTabs Asset Management to learn more about the central bank’s influence on the markets as well as supply and demand activity with the stock market.

In June through Thursday, June 27, bond mutual funds and exchange-traded funds lost $79.8 billion— $70.8 billion from bond Mutual Funds (MFs) and $9.0 billion from bond ETFs. Last month’s outflow from bond funds was nearly double the previous record outflow of $41.8 billion in October 2008.

From a contrarian perspective, all this selling suggests bond yields are likely to stabilize or decline over the near term. Fund investors tend to be poor market timers, particularly when their behavior is extreme. But the swiftness of the stampede out of bonds raises questions about how investors will react when they get their quarterly statements in the coming weeks and notice that their “safe” bond funds are delivering losses instead of gains. Central bankers certainly seem concerned. They were out in force last week to reassure investors that they will not slow the flow of monetary goodies anytime soon. Their increasingly frequent communications campaigns and the sharp market movements in response to Federal Reserve Chairman Ben Bernanke’s press conference show the degree to which markets are being driven far more by central bank intervention than by corporate or economic fundamentals.

Turning our attention to the stock market, our demand-side indicators turned less favorable in the past week. The TrimTabs Demand Index fell 2.4 points to close at 74.2 on June 27 (readings above 50 are bullish). Since the index fell below 75, the TrimTabs Demand Index has turned fully bullish (100% long) from leveraged bullish (200% long) on U.S. equities. In addition, ETF flows suggest the stock market has more work to do on the downside in the near term. Investors in leveraged ETFs have turned aggressively bullish, which is bearish from a contrarian perspective. Leveraged long ETFs issued 7.2% of assets in the past week, while leveraged short ETFs redeemed 6.8% of assets. Another cautionary sign is that U.S. equity ETF flows remained positive amid the recent volatility. These ETFs issued $7.8 billion (0.5% of assets) in the past month even though the average fund dropped 3.2%.

On the supply side, corporate liquidity flows improved in the past week. New offerings fell to a four-week low of $3.4 billion as market volatility made companies less willing and able to sell new shares. Meanwhile, announced corporate buying (new cash takeovers + new stock buybacks) picked up to $18.7 billion as Oracle ($12.0 billion) and Medtronic ($4.1 billion) announced large share repurchases. Net corporate buying in May and June was not as high as it was earlier this year. We will be interested to see if companies become less willing to commit cash to buy back shares in the upcoming earnings season.

The U.S. economy picked up some steam in June. Adjusting for tax changes and the government’s estimate of consumer price inflation, income tax withholdings increased 2.5% year over year in real terms in the five weeks ended Thursday, June 27, up from 1.7% year over year in April and 1.6% year over year in May. Also, unemployment insurance claims data continues to improve, Treasury yield spreads have widened, and the housing market has been a bright spot for the economy. The key question is how much the sharp rise in interest rates will slow the economy’s momentum. It is too early to know now, but we will be tracking withholdings very carefully in the coming weeks.

This communication is a publication of TrimTabs Asset Management. It should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. Information presented does not involve the rendering of personalized investment advice. Content should not be construed as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing performance returns. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Past performance may not be indicative of future results. Therefore, no investor should assume that the future performance of any specific investment or investment strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions, may materially alter the performance of an investor's portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for an investor's portfolio.

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