Rushed exit from bond funds ignites fear of market tantrum

LOW interest rates have incited a craze for risky bonds in fast-growing economies, and few fund companies have been more adept in meeting this demand than Pimco, the world's largest bond manager. Over the past four years, Pimco's flagship emerging market (EM) local currency fund grew to more than US$12 billion from US$1.5 billion as investors, desperate for high-yielding exposure to Brazil, Mexico, Russia and Turkey, showered the fund with cash.

Now, investors are pulling their money out of this and other emerging market bond funds, as across-the-board selling by market heavyweights such as Pimco prompts others to follow suit. Economists and regulators fear that the result could be a system-rattling bond market tantrum.

In a paper presented on Friday at a conference in Manhattan, four influential economists with roots in Wall Street, academia and the Federal Reserve warned that regulators had done little to prepare for such an outcome. The paper was discussed by a panel that included Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, and Jeremy C Stein, a governor at the Fed.