By Sam Forgione
NEW YORK (Reuters) - Investors worldwide poured $4.5 billion into stock funds in the latest week, reversing the prior week's outflows on expectations that the Federal Reserve would keep its bond-buying steady, data from Bank of America Merrill Lynch showed on Friday.
The inflows into stock funds in the week ended June 19 came largely ahead of Fed Chairman Ben Bernanke's comments on Wednesday that the central bank could reduce its bond-buying later this year. The inflows reversed outflows of $8.51 billion the previous week.
"There was a widespread expectation that Bernanke would give out a more dovish statement," said Michael Jones, chief investment officer of RiverFront Investment Group in Richmond, Virginia.
The S&P 500 rose 1 percent over the week on expectations that the Fed would keep its $85 billion in monthly purchases of Treasuries and agency mortgages unchanged. Bernanke disappointed stock markets when he said at a news conference on Wednesday that the central bank would reduce its stimulus later this year if the economy is strong enough.
The Fed's stimulus underpinned a 17 percent rise in the S&P 500 from the beginning of the year through May 21. U.S. stocks turned more volatile when Bernanke said on May 22 that the Fed could reduce its bond-buying later this year if the U.S. economy looked set to maintain momentum.
While stock funds saw higher demand, high-yield junk bond funds saw continued outflows of roughly $2.3 billion in the latest week, said Bank of America Merrill Lynch, citing data from fund-tracking firm EPFR Global.
Those outflows marked an improvement from the prior week, however, when investors pulled $6.48 billion out of the funds, the second most since EPFR began tracking the funds in May 2003.
Prices on high-yield debt have dropped since Bernanke's statements in May. The yield-to-worst on the Barclays U.S. Corporate High Yield Index is currently 6.54 percent, far above its record low of 4.97 percent on May 7. The yield-to-worst is the lowest potential yield on a bond without the issuer defaulting. Prices fall as yields rise.
Funds that hold emerging market bonds also suffered outflows of $2.6 billion in the latest week, their second highest outflow on record according to Bank of America Merrill Lynch.
The selloff in bonds and outflows from bond funds stem from fears of rising interest rates, said Robert Stein, global head of asset management at Astor Asset Management. Stein said, however, that bonds have become attractive at current levels.
"They've backed up to a point where it's gotten overdone," Stein said on the bond market selloff in the wake of Bernanke's statements last month.
The Fed's stimulus has kept interest rates low, leading investors into riskier assets such as stocks. An end to the Fed's stimulus program would push interest rates higher and weaken the value of bonds. The bond market has seen a broad selloff in the past month in anticipation of this effect.
Funds that hold bank loans remained a refuge for investors and attracted $1.5 billion in new cash in the latest week after pulling in $1.4 billion the previous week. Bank loans are protected from rising interest rates by being pegged to floating-rate benchmarks.
(Reporting by Sam Forgione; Editing by Eric Beech)