'Taper tantrum' Part II hitting the bond market

Santelli: Rate hike signals

With the Federal Reserve nearing its first rate increase in about 6½ years, bond investors are bracing for the shock.

Fixed income funds in recent weeks have seen their biggest cash outflows since 2013's "taper tantrum," which occurred after then-Fed chairman Ben Bernanke first signaled to the markets that the central bank's massive liquidity program was coming to an end.

Bond exchange-traded funds have coughed up $7.3 billion in March, a pace that if continued would exceed the exodus that began in May 2013, according to market data firm TrimTabs.

The market is bracing itself for the Fed's direction this year as the Open Markets Committee prepares for liftoff from a policy instituted during the dark days of the financial crisis. The FOMC dropped its target funds rate to near zero—0.11 percent as of Friday—and targeted gains in unemployment and inflation before it would raise. On its face, the funds rate dictates how much banks charge each other to borrow money, but at its core it determines lending rates throughout the economy.

On Wednesday, the FOMC is set to conclude its March meeting, with expectations that it will drop the word "patient" from the post-meeting policy statement. That in turn would signal to markets that a rate hike is coming, likely either in June or September.

However, the U.S. economy has slowed considerably, with many economists taking down growth projections for the first quarter from close to 3 percent to less than 2 percent. One indicator, from the Atlanta Fed, has Q1 growth at 0.6 percent.

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In an analysis accompanying the flows report, TrimTabs said the recent economic developments, which have seen anemic levels of retail sales, production, producer prices and construction, could point to a longer delay for a Fed rate hike.

"Most of the macroeconomic data we track points to a loss of economic momentum rather than an acceleration in growth; debt levels in the economy are very high, and the U.S. dollar has exploded higher as central banks around the world compete to outdo one another with stimulative policies," the report said.

Indeed, despite the bearish fund flows, the benchmark 10-year Treasury traded at 2.08 percent Monday afternoon—about where it started the month, and considerably off the most recent high of 2.24 percent on March 6.

Still, some investors aren't taking any chances amid the volatile gyrations in the market.

A look at flows for individual ETFs shows how much has fled from bond-based funds in March, with one corporate bond offering shedding more than $1.8 billion alone: