'Unprecedented' $80 billion pulled from bond funds
And more investors could take flight after they receive quarterly statements in the coming weeks.
A record amount of money poured out of exchange-traded and mutual bond funds in June, according to a fresh report by TrimTabs, nearly double the amount pulled out of bond funds at the height of the financial crisis in October 2008.
Investor fears over the scaling back of the U.S. Federal Reserve's bond purchasing program has seen the yield on 10-year Treasurys rise sharply to 2.5% as $80 billion left bond funds in June, according to the research.
"The herd is scrambling for the exit this month as bond yields back up across the board and central bankers hint that they might provide less monetary stimulus in the future," TrimTabs CEO David Santschi said in a research note on Sunday. "We estimate that bond mutual funds have lost $70.8 billion in June through Thursday, June 27, while bond exchange-traded funds have lost $9.0 billion."
The rush out of bonds could be about to get even worse, according to the research firm, which says that more bond investors could take flight after receiving their quarterly statements in the coming weeks, noticing that their "safe" bond funds are delivering losses instead of gains.
The global sell-off in bonds began on May 22, after the minutes of the Fed's policy meeting signaled that its bond-buying program -- which has suppressed yields and boosted stocks -- could soon be pared back. Fed Chairman Ben Bernanke echoed that view at a press meeting last Wednesday, suggesting that asset purchases could be scaled back later this year if economic data continued to show improvement.
TrimTabs call the liquidation "unprecedented" after indicating last Monday that bond outflows had already reached records with a figure of $47.2 billion. In just one extra week that number has risen to $79.8 billion which it says is reversing 73% of the $109.6 billion inflows seen earlier this year.
"Until last month, investors had been content to shovel huge sums into bonds with little regard for value, confident that endless central bank liquidity would keep prices at ridiculous levels. It was only a few weeks ago that junk bond yields dipped below 5% for the first time."
Erik Nielsen, chief global economist at UniCredit told CNBC that the interest rate on a benchmark 10-year Treasurys will move even higher after stabilizing at the 2.5% level as bond investors continue to drag money out of funds.
"There's a lot of liquidity, the world is slowly getting better and people are sort of finding the normal level of risk again ... in the process of going to 3 [% bond yields] they will leave," he told CNBC Monday.
Nielsen called this a "critical" period for the bond markets, with the world's pension funds and insurance companies loaded up with "safe haven" government treasuries that are now facing capital losses after receiving negative real yields for three or four years.
"They will like to own it when it gets to 3.5 [%]. But the process from going to 2.5 and 3.5 implies capital losses, and you wouldn't want to sit on those losses in that process if you can avoid it," he said.
Pimco's flagship Total Return Bond Fund (BOND) wasn't immune to the damage either; it took a hefty hit in June as yields spiked. The Pimco fund, which is the world's largest bond fund, with over $285 billion assets under management, shed 2.8% from its net asset value during the month.
Many speculators predict yields will hit a "new normal" of 3%, but Bill Gross -- the manager of Pimco's Total Return Bond Fund -- said in his July newsletter that investors shouldn't jump ship yet and yields should actually be trading at 2.2%.
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Slowly sell your bonds as rates go up and build a ladder of higher yielding equities until bond rates match the lowest of your equities and then sell equities and buy CDs. I'd be mixing a little GLD and GLX just for good measure so when the fear of inflation starts to get hyped you're ready.
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