Bond mutual funds are headed for record redemptions in 2013 amid signals the U.S. Federal Reserve will reduce its stimulus.

Investors have removed $70.7 billion so far this year from bond funds, TrimTabs Investment Research said today in an e-mailed statement. Unless the trend reverses, the redemptions would surpass a record $62.5 billion that investors removed from bond mutual funds in 1994, according to TrimTabs.

Investors have been pulling money from bond funds since May, when Federal Reserve Chairman Ben S. Bernanke first hinted that the central bank might begin scaling back its unprecedented asset purchases. The yield on the 10-year Treasury note is 2.8 percent, up from 1.93 percent on May 21, the day before Bernanke spoke about the possibility of tapering its stimulus.

“The ‘taper talk’ that started in May proved to be a huge inflection point for the credit markets,” David Santschi, chief executive officer of TrimTabs, said in today’s statement, which didn’t provide details of redemptions across various categories within fixed income.

Bill Gross’s Pimco Total Return Bond Fund (PTTRX), which lost its title as the world’s largest mutual fund in October, had its seventh straight month of withdrawals in November as investors continued to flee bonds. The $244 billion fund suffered $36.9 billion in estimated redemptions in the first 11 months of the year, according to Chicago-based Morningstar Inc.

David Fuller's view

Eoin and I have been mentioning the new risks in holding bond funds, not least the fact that they offer no yield to maturity for investors, now that the bull market in terms of a secular decline in yields is over.

It remains to be seen where most of the money coming out of bonds will be reinvested in the months and years ahead.  There are lots of choices, ranging from shorter duration fixed interest investments, to stock markets, property or perhaps even that long awaited binge. 

Personally, I feel that some of the Autonomies with respectable yields are a good choice.  However, I would wait until we have seen at least some mean reversion.  Additionally, I would be very careful where shares are clearly overextended in terms of valuations and particularly surges above rising 200-day moving averages.  For instance, Amazon (weekly & daily), which I regard as a fantastic company.  However, it is currently an overextended momentum play, has no yield and sells at an estimated P/E of 472, according to Bloomberg.  Similarly, Nike (weekly & daily), which is brilliantly managed and I love their shoes. However, it is clearly overextended and forming a weekly key reversal following today’s downward dynamic.  It also trades at an estimated P/E of over 25 and Y of only 1.25%. There are plenty of others which are similarly overdue for sharp reactions. 

Remember, in this Fed-fuelled move it has now been 553 days since a 10% correction occurred on Wall Street.  This game is seldom fair and most less overextended markets will fall even further than USA indices.