Central banks sold a record amount of US treasury debt last week and bond funds suffered the biggest investor withdrawals on record as global markets shuddered at the prospect of the US Federal Reserve ending its quantitative easing programme.
Gold touched a fresh three-year low of $1,180 a troy ounce, having tumbled 29.5 per cent since the start of the year.
The slide in gold, which began in earnest in April, has accelerated in the past fortnight after US Federal Reserve chairman Ben Bernanke set out for the first time a framework for the US central bank to exit its programme of “quantitative easing”.
Gold holdings of US treasuries held at the Fed on behalf of official foreign institutions dropped a record $32.4 billion (€24.9 billion) to $2.93 trillion, eclipsing the prior mark of $24 billion in August 2007.
It was the third weekly outflow in the past four weeks and came as Japanese invesrtors, who are big holders of US treasury debt, sold a net $12 billion of foreign bonds last week, their biggest sale in 14 months.
Worst hit
Bond funds tracked by data provider EPFR Global saw total redemptions of $23.3 billion in the week to June 26th.
US funds were the worst hit, with withdrawals totalling $10.6 billion, but emerging market debt funds also saw record redemptions of $5.6 billion.
That is twice last week’s withdrawals.
Over the past five weeks emerging market debt and equity fund outflows have totalled $35 billion, of which $22.5 billion has fled stock market funds.
“People are throwing in the towel,” said Markus Rosgen, chief Asia equity strategist at Citigroup.
“It’ll drag the market down lower over the course of the summer.”
Fixed income markets have tumbled since Mr Bernanke first signalled on May 22nd that the US central bank would begin reducing its asset purchases later this year.
Yields on 10-year US treasuries have risen sharply since then, hitting 2.52 per cent yesterday compared with 1.62 per cent at the start of May.
Global markets have regained some of their footing this week, with bond yields declining and most stock markets clawing back some of their losses.
The FTSE All World Index gained 2.7 per cent since Tuesday, and the average international bond yield for emerging market government fell to 6 per cent, after spiking to 6.4 per cent, the highest since October 2011.
Rate increases
Fund managers stress that the Fed is still buying billions of dollars worth of bonds for months to come, and say actual interest rate increases are far away.
But most are still cautious, and are waiting for US treasury yields to settle.
Some asset managers are concerned that if outflows continue it could force some to sell positions once more and trigger another, deeper leg in the fixed income rout.
Hedge funds, inspired by a strengthening US dollar and declining inflation expectations, have been betting against gold for some time.
But bankers say Mr Bernanke’s remarks helped to trigger a wave of selling by supposedly longer-term investors – the wealthy individuals with Swiss bank accounts and pension fund managers who have been instrumental in fuelling gold’s decade-long bull market.
“What was a long-term holding, now that the price is $300 lower, doesn’t look so long term any more,” said one senior precious metal banker.
The scale of the shift away from gold by investors has been dramatic.
Exchange-traded funds have sold a fifth of their holdings so far this year.
– (Copyright The Financial Times Limited 2013)
