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By Christine Benz and Michael Rawson, CFA | 07-15-2013 02:30 PM

Investors Bail on Bond Funds

As yields rose, both taxable- and municipal-bond funds saw record monthly redemptions in absolute terms in June.

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

Rising bond yields meant a tough month for fund flows in June 2013. Joining me to discuss the latest 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: As I said, Mike, it was a month in which we saw bond yields creep up about 80 basis points, and we saw a lot of bond funds have pretty significant losses. So it's probably not surprising that investors were doing some selling.

Rawson: It was just a terrible month in terms of bond flows. Both taxable-bond and municipal-bond funds lost the most money that they've ever lost on record. So very strong outflows.

Now, of course, those category groups have grown tremendously over the past several years, particularly last year when they had such strong inflows. So on a relative basis, divided by assets, the outflows weren't as strong as they were back in October 2008, during the height of the financial crisis.

Looking at the longer timeframe, outflows were much larger and more sustained back in 1994. 1994 was a year in which the Federal Reserve raised interest rates, and bond funds did pretty poorly that year. So hopefully this isn't a sign of things to come, but … we have [seen] a lot of interest rate increase in a very short period of time, and very rapid outflows.

Benz: When you look at the categories that have seen the biggest outflows recently in terms of taxable bonds, where have investors been concentrating their sales?

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