What a difference a year makes.
This time last year, traders were talking about a “great rotation” from bonds into equities. For a few short weeks in January, it all seemed to be going to plan, with stellar stock gains starting in earnest. However, it now appears this January was all about a rotation of the rotation with stocks in retreat and record outflows from equity fund investors.
U.S.-based exchange-traded fund (ETF) investors withdrew a net $22.3 billion from their accounts in the week ending February 5, according to data from research tracker Lipper on Thursday.
(Read More: Emerging market fund outflows surpass whole of 2013)
This was the their highest weekly net outflows on record, it said, surpassing the $19.5 billion of outflows for the week ended June 25, 2008. Investors also dropped the SPDR S&P 500 ETF “like a hot potato”, according to Lipper, with net outflows of $7.6 billion and shunned the iShares MSCI Emerging Markets with net outflows of $2.5 billion.
Similar research from the equity analysis arm of Citibank shows that there was a $24 billion outflow from U.S. equity funds in the same week. Consequently, there was a $13 billion inflow into U.S. bond funds, it said, with both these figures representing record highs in both cases.
Global equity markets have suffered several torrid days of trading this year, not just in the last week which saw the Dow Jones Industrial Average shed over 300 points Monday. Fears over the future of China’s growth plan, the “tapering” of the U.S. Federal Reserve‘s bond-buying program and accompanying weakness in emerging market currencies have well and truly seen “risk-off” sentiment return.
Often seen as less riskier than stocks, fixed income assets like bonds are enjoying a little more time in the limelight after a 20-year bull market. Last year was seen by many analysts as the year that bonds would lose favor, with real interest rates looking to move higher as the Federal Reserve cut down on its stimulus program. It now looks like many bond investors may have been caught on the wrong side of the trade.
The yield on the U.S. government’s 10-year bond – a bellwether for the market as a whole – stood at 2.7003 percent on Friday morning. This shows a considerable cooling compared to moves above 3 percent in December. Due to its inverse relationship, a lower yield means that a bond’s price is higher, showing it is more in demand.
(Read More: Hedge funds bet oncritical US shortage soon)
Bond ETF investors were especially active during the last week, according to Lipper, pumping a record $9.4 billion net into these products. Treasury products also received sizable cash, with over $7 billion of net inflows into two large iShares Treasury bond funds, it said.
Investors continued to shun the emerging market funds, according to Citi, who calculated an exodus of a net $6.4 billion.
“This was the 15th week of outflows from EM equity funds and was the largest outflow since August 2010,” Citi analysts at Markus Rosgen and Yue Hin Pong said in a note on Friday.
By CNBC.com’s Matt Clinch. Follow him on Twitter @mattclinch81.