Bond exodus accelerates as yields creep nearer 3%

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Outflows from U.S. bond mutual funds and exchange traded funds has accelerated in August, according to a new report by TrimTabs, as fears grow of the threat that rising yields pose for the U.S. economy.

"We are concerned that the Fed is starting to lose control of the bond market, which is not good news for the stock market or the highly leveraged U.S. economy," TrimTabs said in the report.

So far this month, U.S. bond mutual funds and ETFs have seen outflows of $19.7 billion, more than the $14.8 billion of outflows in July. August's outflow is already the fourth-highest on record, TrimTabs said, adding that since the start of June bond funds have lost $103.5 billion or 2.7 percent of total assets.

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The sell-off in bonds pushed yields on the U.S. 10-year to 2.8656 percent on Monday morning, the highest since July 2011.

"Heavy bond fund redemptions and the backup in bond yields should concern all investors, not just bond investors, because the U.S. economy is a highly leveraged economy that will not easily tolerate higher borrowing costs," TrimTabs CEO David Santschi said in the note.

Contrary to popular belief, the only meaningful deleveraging in recent years in the U.S. economy occurred because mortgage borrowers went through foreclosures, not because consumers or companies aggressively paid down other forms of debt, he said.

"If the Fed truly starts to 'taper' and fund investors continue to decide that they do not want to buy bonds at ridiculously low yields any longer, who will be left to buy all the debt that the U.S. government and corporate America need to sell at low rates," he said.

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Yields on 10-year benchmark U.S. Treasurys rose above 2 percent on May 22, after the Federal Reserve's policy minutes sparked fears the central bank could start tapering off its bond purchases this year. Fed bond purchases have led to a huge rally in bond prices, pushing interest rates down and helping spur the economic recovery.

But with a slew of positive economic reports from the U.S. recently, some believe the Fed may start to curb bond purchases as early as September. That's sent jitters through thin summer markets with the Dow Jones posting its worst week in 2013 last week.

The annual Federal Reserve gathering in Jackson Hole on Thursday and the minutes of the last Fed meeting on Wednesday could keep markets volatile in the coming week.

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"The risk with the FOMC (Federal Open Market Committee) minutes is whether the Fed has begun discussing a possible change in its threshold rate for unemployment as a means of providing additional accommodation," analysts at Barclays said in a research note on Monday.

"Any discussion in this regard is likely to be viewed as a dovish surprise by the market and lead to a near-term rally in the belly of the curve."

By's Matt Clinch. Follow him on Twitter @mattclinch81