LONDON, June 8 (Reuters) - Bond funds suffered large redemptions in the week to June 6 with those targeting investment grade debt suffering their biggest outflows since December 2016, Bank of America Merrill Lynch (BAML) said on Friday.
The bank's data, which tracks fund flows from Wednesday to Wednesday, showed that investors withdrew $5.5 billion from bond funds and $500 million from precious metals but put $900 million to work in equities.
Global bond markets had come under pressure in recent weeks from a combination of escalating trade tensions, the tremors of heightened political risk across the euro zone over Italy's attempts to form a government and the prospect of major central banks raising interest rates and tapering stimulus.
"Fed late-cycle tightening, investors short leverage/long secular growth = turbo-charging U.S. versus EU/EM," BAML analysts wrote in their weekly note.
Breaking down fixed income flows, investors pulled $2.2 billion from investment grade bonds, inflicting the biggest outflows in 1-1/2 years.
But riskier assets also suffered, with high-yield bonds recording a $3 billion outflow in their fifth straight week in the red while investors withdrew $1.9 billion from emerging market debt in a seventh straight week of outflows.
BAML predicted there may be more pain ahead.
"Bad summer news for risk assets: QE security blanket for markets has vanished ... investors targeting weak credit stories; emerging markets now in tightening cycle and ECB (who else?) threatening a QE taper policy mistake in autumn," the bank's analysts wrote, adding they remained defensive and happy to sell risk assets into strength until the Fed was forced to pause.
"Big risk is, as in 1998, credit tremors spread and investors forced to deleverage from risk assets, raise cash ... when investors delever they can only sell what they own."
The bank also said its private clients' cash levels currently stood at new lows of 9.9 percent of assets under management, testifying to their appetite for risk.
Meanwhile investors put their money to work in equities, with Japanese stocks taking in a massive $3.8 billion while U.S. equity funds added a modest $40 million. Europe continued to see massive outflows, losing $4 billion and taking year-to-date outflows to more than $17 billion.
Looking at the sector breakdown, tech stocks reaped their second highest inflows at $2.3 billion, while materials, healthcare and real estate stocks all added $400 million.
"One big flow winner in Q2: Tech...2nd biggest week ever; $17.3 billion year-to-date on pace for record," BAML analysts noted.
Meanwhile utilities and financials suffered outflows of $300 million and energy stocks of $600 million. (Reporting by Karin Strohecker; Editing by Toby Chopra)