The possibility that the Federal Reserve may soon begin to scale back its $85 billion of monthly bond purchases has fueled a flight from bond mutual funds.
Investors steadily added money to bond funds from January through May, but in June they made average net withdrawals of more than $15 billion a week, according to the Investment Company Institute.
They’re concerned because the Fed’s stimulus has helped keep long-term interest rates at record lows. Any pullback in its bond-buying program would likely mean higher interest rates. Speculation about an end to the Fed’s bond purchases helped push the 10-year Treasury yield as high as 2.74 percent, up from a low of 1.63 percent in ealy May.
Higher interest rates are bad for investors who already own bonds because it makes the lower yield on those bonds less attractive, and the price of those bonds declines.
Long-term bond funds are hurt most when rates rise because their bonds continue earning a lower interest rate longer. Bonds in a short-term fund mature sooner, and the fund can buy new bonds that pay the higher rate.Associated Press