Bond Mutual Funds, ETFs Post Record Outflow

"Until this month, investors were piling into all sorts of exotic credit instruments with little regard for value, confident that endless central bank liquidity would inflate prices," Santschi added.  "The massive selling at the mere suggestion that this liquidity might diminish shows the degree to which central bank intervention is driving the markets."

In a research note, TrimTabs explained that bond yields are likely to stabilize or even decline over the near term.  Fund investors tend to be wrong, particularly when their behavior becomes extreme.

"The ferocity of the recent selling does raise longer-term concerns," Santschi concluded.  "How many of the investors who pumped a record $1.21 trillion into bond funds from 2009 through 2012 have experienced a rising interest rate environment?  And how will they react when they get their quarterly statements in a couple of weeks and see that their 'safe' bond funds are delivering losses?"

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