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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Bond Fund Inflow Picking Up

Tim Quinson Bloomberg News

U.S. mutual fund investors are purchasing bond fund shares at the fastest rate since 1993, the year before the Federal Reserve raised interest rates six times to combat inflation, according to an industry report.

In a search for yield, almost all the net inflows to fixed-income funds are going to junk bond funds, said James Bianco, director of research at Arbor Trading Group Inc. in Barrington, Ill.

A net $9.5 billion was invested in bond funds in the first half of the year, which includes all those investing in taxable and tax-exempt fixed-income securities, according to the Investment Company Institute. That compares with all of last year when a net $12.6 billion was invested in bond funds.

Junk bond funds are popular because they generate the most “equitylike” returns, Bianco said. “The only way fund groups can drum up interest in bond funds is if stocks go down and they can say bond funds offer a better alternative than losing 20 percent in the stock market.”

In the first seven months of this year, the average junk bond fund advanced 8.78 percent, while the average general government bond fund gained 5.26 percent, according to Lipper Analytical Services Inc. By contrast, the average equity fund rose 21.48 percent.

For that reason, and because the stock market has had only a brief, if sharp decline since last week, the inflows to bond funds were still tiny when compared with what’s flowing to stock funds. A net $110.2 billion was invested in stock funds in the first half of this year, almost 12 times more than what was invested in bond funds, according to the ICI, the industry’s Washington-based trade group.

Once upon a time, bond funds were more popular than equity funds. From 1990 to 1993, a net $283.2 billion poured into bond funds, exceeding the $261 billion that went into stock funds, the ICI reported.

Then, in 1994, the U.S. bond market had one of its worst years ever. Almost $50 billion was pulled from bond funds in 1994 and 1995 as returns lagged and some funds even lost money for investors. By contrast, almost $250 billion went into equity funds in the two-year period.

Concerns about stocks are increasing following two 100-point declines in the Dow Jones Industrial Average over the past week.