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Investors pull billions of dollars from bond and money market funds at fastest pace in years

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Investors are pulling money out of bond and money market funds at the fastest pace in years, as inflation and the specter of rising interest rates threaten returns in the short term.

The outflow has been starkest for money market funds, which are cash-like funds with a low level of risk.

Investors shifted $148 billion out of money market mutual funds and exchange-traded funds between Jan. 1 and Feb. 16, according to Morningstar Direct data.

They pulled out $134 billion in January, the category’s highest recorded monthly exodus in more than a decade, according to Morningstar.

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Investors also pulled money out of both taxable and municipal bond funds in January, for the first time since March 2020, during the U.S. recession fueled by the Covid-19 pandemic, according to Morningstar.

Prior to the pandemic, investors hadn’t taken money out of these bond funds during any month dating to 2018.

Investors have withdrawn $9.8 billion from taxable bond funds and $3.4 billion from municipal bond funds since the start of the year, to Feb. 16, according to Morningstar.

Inflation and higher interest rates

Investors seem to be reacting to inflation and the likely impact of higher interest rates.

Money-market funds are conservative, generally investing in cash, short-term U.S. government bonds and other safe securities. High levels of inflation are eating into the relatively low returns offered by such funds. The Consumer Price Index increased 7.5% in January from a year earlier, the fastest rate since February 1982.

The Federal Reserve is expected to raise interest rates starting in March to cool down the economy and rein in inflation. However, bond prices move opposite interest rates — meaning investors in bond funds will likely lose money as the central bank raises rates.

“Upcoming monetary policy tightening may have pushed some investors to the exits,” Adam Sabban and Ryan Jackson, research analysts at Morningstar, said of bond outflows in a recent research note.

(Investors can expect bond returns to rise over time as the Fed raises its benchmark interest rate, since the shorter-dated bonds will mature and fund managers can buy new ones at higher yields.)

It seems investors have also been skittish when it comes to U.S. stock funds. They withdrew a net $20 billion from U.S. equity funds in January, after adding an average $12.5 billion a month in 2021, according to Morningstar. Investors poured $26.6 billion into international stock funds January.

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