The Investment Management Association recorded the greatest number of bond fund sales on record in June – thanks to the news that the US is to begin tapering its quantitative easing package.
Following Ben Bernanke’s comments, Andy Haldane, the Bank of England executive director responsible for financial stability told MPs that the "biggest bond bubble in history" was at risk of bursting.
The threat of capital loss has proved too great for investors who have pulled £624 million out of bond funds according to the IMA.
Equity funds remained the bestselling sector in June, with net retail sales of £884 million.
Morningstar’s Ali Masarwah, of the European Research Team, said that according to Morningstar Direct Asset Flows data, money market funds also experienced outflows, so in total almost EUR 57 billion exited industry coffers last month.
“Bond fund investors grew nervous over the potential for rates to rise in June. The U.S. Federal Reserve laid out a timetable for the tapering of bond buying, commonly known as QE3. The 10-year German government bond interest rate went from 1.21% on May 1 to 1.81% on June 24,” he said.
“Given the uptick in rates, fixed income bore the brunt of the outflows, absorbing EUR 30 billion of the total outflow amount. The exodus from bonds in Europe mirrored events in the United States in relative terms. Outflows from bond funds in Europe were 1.75% of beginning assets, whereas in the U.S. the figure was 1.88%.”
Among the most popular funds on the Direct platform were US Large-Cap Equity funds and Global Equity Income funds.
The least loved funds included Global High Yield Bond and US Corporate Bond funds.
Morningstar analyst Oliver Kettlewell said that because bond yields are so low, there was only one way for them to go - upwards.
"As bond yields rise, investors will incur capital losses," he said. "It is difficult therefore to see the relative value of investing in bond funds at this time in comparison to an asset class such as equities."
Mr Kettlewell said that bond funds still offer diversification as part of a balanced portfolio, but argued that now would not be the time to take an overweight position.