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By Christine Benz and Michael Rawson, CFA | 08-14-2013 10:30 AM

Investors on the Move as Rates Rise

Investors appeared to be trading interest-rate risk for equity and credit risk in the wake of this summer's rate-driven bond volatility.

Christine Benz: Hi. I'm Christine Benz for Morningstar.com.

Investors appear to be trading interest rate risk for equity and credit risk in the month of July. Joining me to discuss the latest fund flow data is Michael Rawson. He is a fund analyst with Morningstar.

Mike, thank you so much for being here.

Michael Rawson: Thanks for having me, Christine.

Benz: Mike, I think it's interesting, when you look at fund flows for the month of July, you saw modest outflows from taxable fixed-income funds. But you say that there is a lot of action underneath the surface. Let's talk about some of the choices that investors are making, and specifically what they've been selling, especially since the interest rate shock we had in that period from May through early July.

Rawson: You mentioned that May through early-July period, and that's when interest rates really spiked up. We saw huge outflows, record outflows, from taxable-bond funds, the category group overall, particularly from intermediate-term core bond funds.

So over the last several weeks, in the month of July, we continued to see outflows from those categories, the safe categories--the categories which are traditionally seen as safer--intermediate bond, intermediate-term government bond, and long-term bond.

But we had inflows that offset those outflows. So on the surface, it looked like the flows to taxable bond had moderated, but it was investors trying to get away from interest-rate risk, and maybe taking on some more credit risk. So they went to bank-loan funds, they went to high-yield, and they went to nontraditional bond funds.

Benz: Let's drill into some of the categories that investors were selling. You noted in your recent report that the Ginnie Mae funds saw very large outflows. Let's talk about what's been going on in that group.

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