Europe bond funds hit by big outflow

European bond funds suffered their largest withdrawals in more than a year and the redemptions from the continent’s equity funds inched closer to the $100bn mark as a turbulent pound highlighted the risks of the looming UK exit from the EU.

Money managers invested in European stocks recorded $1.1bn of withdrawals in the week to October 12, the 36th consecutive week of outflows, according to fund flows tracked by EPFR. European bond funds, which had benefited from central bank stimulus programmes in the wake of the Brexit vote in June, were hit with $2.2bn of outflows. That marked the largest weekly withdrawal since June 2015.

The flows underline the effect a 6 per cent move in sterling over a two-minute span last Friday has had on investor psyche, accelerating a months-long rotation out of European stock and bond markets. The pound has slid 17 per cent against the US dollar and 15 per cent against a basket of the country’s largest trading partners, Deutsche Bank data show.

“As we get closer and we have timelines set by the government for Brexit, it is much more front of mind, people are pricing that in and you are seeing that reflect in the pound,” said Andrew Lee, who works within UBS Wealth Management’s chief investment office. Brexit is “weighing on people’s minds”, he added.

Concerns have also arisen around the potential for a rise in bond yields should central banks rein in accommodative monetary policies. Investor concern has centred on how and when the European Central Bank will begin to curtail its asset-buying programme.

“I think folks always knew it was going to have a sunset but the feeling is it may be closer than we thought a few months ago,” said Jim Shepard, co-head of investment-grade debt capital markets at Mizuho.

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Mr Lee added: “Think about what the ECB has been signalling. The talk of [tapering] is one thing, but our expectation remains the actual action will come farther out.”

Outflows from UK equity funds eased modestly from a week earlier, with investors redeeming $191m from money managers. It marked the 11th consecutive week of outflows for the asset class and lifted redemptions from the year’s start to nearly $6.5bn.

The flood of redemptions from prime money market funds also continued this week, with a further $56bn being withdrawn, taking year-to-date outflows to $834bn, shrinking the total assets in prime funds to $413bn, according to data from the Investment Company Institute.

The outflows have come in anticipation of the implementation of money market fund reform that will take effect on Friday. After the deadline investors could be subjected to fees for withdrawing their money during periods of stress and potentially prevented from redeeming money altogether.

It has seen cash exit the prime fund space, with government money market funds, which only invest in government assets, being the main beneficiary. Assets in government funds increased by $51bn this week, taking total assets up to $2.1tn, up from $1tn at the start of the year.

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