Rotation from U.S. bond funds to stocks slows: Lipper

© Reuters. Rotation from U.S. bond funds to stocks slows: Lipper

By Trevor Hunnicutt

NEW YORK (Reuters) - Investors pulled more money from U.S.-based bond funds during the latest week, Lipper data showed on Friday, adding to an onslaught following the U.S. presidential election.

But the $595 million snatched from the bond funds over the seven days through Wednesday is minor compared with the $9.7 billion they withdrew the week before, data from Lipper and the Investment Company Institute trade group showed.

Nonetheless, markets are betting that Donald Trump's surprising Nov. 8 election as president could spark inflation given the president-elect's plans to boost infrastructure spending and cut taxes. That could boost stocks but harm bonds.

U.S. Treasuries on Friday were on track for their worst monthly performance in almost eight years.

Investors often use bonds to limit risk because as stocks lose value, bonds can perform well. However, with rates moving up, bonds may lose value even if stocks crater.

"What is the purpose of bonds now?" asked Theodore Lucas, head of systematic strategies and exchange-traded funds (ETFs) for Hartford Funds Management Group Inc. "It looks very different now than it has over the last three decades."

Investment-grade bond funds took in $1.6 billion during the week, the largest inflows in a month, Lipper said. Fixed-income investors are favoring bonds that act more like stocks, peeling away exposure to rate-sensitive government bonds and doubling down on corporate bonds, which are exposed to credit risks similar to stocks and typically move less in response to rate shocks.

STOCKS STOP MOVING IN SYNC

U.S.-based stock mutual funds and ETFs attracted $452 million during the seven days through Nov. 23, according to Lipper, after a record-setting week of sales for stock ETFs the week before.

Small-cap value funds took in $591 million during the week, the second-largest inflows on record, the research service said.

Small companies and "value" stocks that sell at cheap prices, compared to their intrinsic worth, are among those historically seen as doing well as inflation kicks in.

Lucas said those companies could also be thriving because value stocks have been trailing the market and small-cap companies earn less of their revenue from abroad. Trump has pledged to impose tariffs on many imports from China and Mexico.

The small-cap Russell 2000 index has returned 12.8 percent since the election, including dividends, compared with the large-cap S&P 500's 3.2 percent.

Meanwhile, the S&P Growth Index trails its value counterpart's 5 percent return by 3.6 percentage points over the same time period, also including dividends.

Stocks broadly are no longer moving closely together as they once did.

CBOE's S&P 500 Implied Correlation Index, a market-based estimate of the interdependence of S&P 500 stocks, has plunged since the election as financials and other once-underappreciated stocks have soared. Higher Treasury rates boost the cost of financing, helping bank earnings.