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Bond ETF withdrawals surge as investors brace for higher rates

[SINGAPORE] Investors in US exchange-traded funds have sold the most bonds in November in five months as they prepare for the Federal Reserve to raise interest rates.

They pulled US$1.12 billion from US fixed-income funds, which are also the first withdrawals since June. While the Fed has emphasised it plans to move at a gradual pace, the figure highlights the extent to which bond investors are seeking protection as the prepare for the first increase in almost a decade.

"I don't have any position in Treasuries now," said Soniya Chen, a government bond trader at Hontai Life Insurance Co in Taipei.

"It looks like they're going to raise rates in December." Ms Chen said she sold the US, government securities in her portfolio in September. She's bullish on higher-yielding government bonds and added to her position in Mexico this week, she said.

The benchmark US 10-year note yield was little changed at 2.26 per cent as of 7 am in London, according to Bloomberg Bond Trader data. The price of the 2.25 per cent security maturing in November 2025 was 99 30/32.

The Bloomberg US Treasury Bond Index has fallen 0.6 per cent this month through Thursday, though it trimmed losses during the past two weeks.

The probability the Fed will increase its benchmark by its Dec 15-16 meeting is 68 per cent, according to futures data compiled by Bloomberg. The calculation is based on the assumption the effective fed funds rate will average 0.375 per cent after liftoff, compared with the current range of zero to 0.25 per cent.

Fed officials inserted language into their October statement to stress that it may well become appropriate to raise the benchmark rate in December and largely agreed that the pace of increases would be gradual, minutes of the meeting issued this week showed.