By Trevor Hunnicutt
NEW YORK (Reuters) - Investors dumped U.S. government debt funds during the latest week, Lipper data showed on Thursday, pulling the most cash from those funds since March 2016 and exacerbating a bond selloff that spooked markets.
Nearly $1.7 billion hemorrhaged out of U.S.-based mutual funds and exchange-traded funds (ETFs) invested primarily in Treasury bonds during the seven-day period through Oct. 3, according to the Refinitiv research service.
Bond investors are growing restless as signs of inflation build and the U.S. Federal Reserve sticks to its plan of containing prices by hiking interest rates.
"The Street fears they might accelerate the interest rate program that they're on right now," said Pat Keon, senior research analyst at Lipper.
With potentially inflationary U.S. tariffs already taking effect, data on Wednesday showed U.S. service sector activity hit a 21-year high and ADP private payrolls data for September was also strong. Monthly U.S. jobs data is due on Friday.
U.S. benchmark 10-year Treasury note yields leapt to their highest since May 2011.
Fund investors were quick to adjust, raising stakes in lower-grade corporate credit. Those bonds are expected to hold up better than government debt when rates are rising, as long as the economy keeps growing. High-yield bond funds attracted $1.4 billion during the week, the most since July, Lipper said.
Oil prices, meanwhile, are more than $10 higher than they were at the beginning of the year, another sign of the price pressures building but also a help to energy companies that have issued debt in recent years to bring that crude to market. U.S. benchmark oil futures settled at $74.33 per barrel on Thursday, up from around $60 in January.
Inflation-protected bond funds posted $544 million in withdrawals, the most in any week since June 2013, suggesting some fund investors are focused more on rising rates than inflation. These types of bonds only protect against the latter.
Stock fund investors repositioned on the move in rates, too.
Real estate funds recorded $700 million of withdrawals, the most since June, according to Lipper. The sector depends on debt financing that becomes more expensive when rates rise.
And investors pulled $1.7 billion from bank sector funds, the most since January 2015. Higher rates help banks, but only when there is enough of a gap between short- and long-term lending rates from which they can profit. Healthcare and Japanese stocks drew more cash in the latest week.