LONDON, Nov 13 (Reuters) - Bets the Federal Reserve will raise U.S. interest rates for the first time in almost a decade next month saw investors pull out of Treasuries at the fastest rate in 1-1/2 years over the last week, Bank of America Merrill Lynch said on Friday.
There was $4 billion of outflows from U.S. and other government bond funds over the last week while emerging market debt funds saw another $2 billion of redemptions in what was their 15th week of outflows in the last 16.
The big beneficiaries were European equity funds which are being buoyed by the prospect of another dose of Mario Draghi’s stimulus from the ECB next month.
There were $1.7 billion inflows into the European stocks funds as they notched up their 24th week of gains in the last 26.
“Weekly flows dictated by Fed tightening, chunky rotation out of bonds, ECB QE & expectation of stronger dollar, outflows from EM,” a summary of the BofA Merrill Lynch closely-watched weekly Global Research report said.
It also flagged up some potential omens.
The past six weeks have seen the heaviest redemptions from short-term bond funds and the largest inflows ($105 billion) into money market funds since the collapse of Lehman Brothers threw the financial world into turmoil.
December also could also be the first time since bond markets crashed in May 1994 that the Fed raises interest rates as Europe cuts. 1987 and 1937 were both “crash years” when interest rates went in opposite directions on either side of the Atlantic too.
Emerging markets are highly sensitive to the Fed because the relativeness attractiveness of higher EM interest rates gets eroded when U.S. rates rise.
Compounding the chunky redemptions from EM bond funds, EM equity funds also saw $2.2 billion of withdrawals, their largest in just over two months the data, which also includes figures from fund tracker firm EPFR, showed.
There were smaller $0.3 billion and $0.1 billion outflows from U.S. and Japanese equities.
By sector, financials saw their fourth straight weeks of inflows ($0.2 bln), tech stocks saw a fifth week of inflows ($0.5 bln) while there was $0.5 billion pulled out of utilities. (Reporting by Marc Jones; Editing by Andrew Heavens)