Retail threat to euro zone bond markets

November 28, 2011

Because of the peripheral euro zone bond implosion, many European bond market funds have suffered losses this year. JP Morgan says a major risk to European bond markets stems from liquidations by retail investors (aka Mrs Watanabe from Europe).

“Retail investors who bought bond funds as a savings vehicle are now experiencing capital losses on their holdings… Retail investors’ fund flows tend to be a function of past performance,” the bank says.

According to year-to-date performance of 556 bond funds that invest in Western European bonds, as many as a third have negative returns. The 7 funds with worse than -20% YTD performance have high exposure to Greek bonds (no doubt).

The 71 funds with greater than 10 percent YTD performance were all invested in UK sterling bonds.

JPM cites separate data by the European Fund and Asset Management Association that shows European retail investors were heavy sellers of bond funds already in August and September.

“With the caveat that the EFAMA universe includes European domiciled funds that also invest in non-European bonds, this pattern is concerning, and given intensification of the stress in November, it raises the risk of even heavier liquidations into the year-end,” the bank says.


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