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All Clear? Bond Funds Post First Outflow in 2 Years

In a sign that regular investors burned by the credit crisis are finally ready to embrace this stock market rally, bond exchange-traded funds recorded their first outflow since the equity bull market began in March of 2009.

The ETFs, which track Treasury, municipal and corporate bonds, posted a net outflow of $501 million in November, their first outflow since way back in October 2008, according to Birinyi Associates.

Investors pulled the most money from ETFs that invest in government bonds, such as the iShares Barclays 20+ Year Treasury Fund and the iShares Barclays 7-10 Year Treasury Fund , according to the Birinyi data.

Still rattled by the wealth-destroying collapse of Lehman Brothers, befuddled by a decade for equities that provided zero return, and worried about their employment prospects, regular investors refused to jump into this equity rally headfirst and opted for the low return safety of bonds.

The S&P 500 is up more than 80 percent from its 12 ½ year low hit during the nadir of the credit crisis on March 9, 2009, yet investors continued to pile more money into bond ETFs, mutual funds and individual bond issues.

Investors have poured $609 billion into bond mutual funds from March 2009 to the end of October 2010, according the latest data from the Investment Company Institute. Bond mutual funds also had net inflows every month. Over the same period, despite the rally in the asset class, mutual fund investors pulled $22 billion out of equity-focused funds. Because of their relative ease to buy and sell (they trade just like stocks) ETFs could signal what’s to come for the slower moving mutual fund money.

Ironically, the ETF outflows began just as Federal Reserve Chairman Ben Bernanke announced a quantitative easing plan to purchase $600 billion in Treasury securities. Many investors feel the well-telegraphed move by Bernanke was already priced into the fixed income market and that economic improvement may mean the Fed Chief won’t even have to complete this buying program.

The outflow in bond ETFs was accompanied by a shellacking for bonds in November. The 10-year Treasury note lost 4 percent of its value last month.

To be sure, the contrarian investor will look at this as a screaming sign that it is time to leave equities. If the retail investor is finally catching on to this equity bull market 20 months later, then the easiest money has been made, they would say. Of course the flip side is that there is an awful lot of money left in bonds that could fuel this stock bull market if it is withdrawn.

* For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.

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