Americans are leaving the bond mutual funds in its fastest pace in more than two years.

Americans are leaving the bond mutual funds in its fastest pace in more than two years.

U.S. investors withdrew 8.6 billion U.S. dollars of bond funds in the week ended Dec. 15, the biggest retreat since October 2008 when financial markets were in freefall. They took an average of nearly $ 3 million per week from November 23 under the Investment Company Institute. By November, the money has been flowing into bond funds every week for almost two years.

"This is the real deal," says Marilyn Cohen, founder of Envision Capital Management, which oversees $ 300 million in mostly fixed-income investments.

If she's right, the end of cheap credit is near. Interest rates would rise, which dominated the economy. It would be more expensive for cities, states and businesses to borrow money to build schools, roads and expand their businesses. It would also make the value of bond funds to fall back on the Americans who thought they had hidden their retirement savings into an investment that would not sink.

Bond funds are creditors. Take money from savers and lend it to businesses and governments in return for interest payments and promises that the money will be refunded on a particular date. If there is less money to lend, borrowers must pay higher rates to persuade the funds to buy its bonds.

It follows the law of supply and demand. If there is less of something, which pushes the price up. In this case, if the flow of money running into fixed income funds dried, cities, states and corporations that depend on them for financing will end up paying more to borrow.

That would hurt the cash-strapped states like California and Illinois, who can not afford higher debt payments. It also means that Wal-Mart Stores Inc., Johnson & Johnson and other corporations will no longer be able to borrow money at cheaper rates in history. IBM Corp. sold $ 1.5 billion of bonds in August at a rate of only 1 percent.

With few exceptions, Americans have favored U.S. stocks on the bonds since early 1990. The housing crisis broke that habit. The U.S. stock funds began to bleed cash in 2007 and bond funds began accumulating up.

That change was intensified during the financial crisis as people sought safer investments and bond funds began publishing becomes stronger. Banks and foreign governments issued U.S. bonds a favored hiding place during the financial crisis, knocking the yield on the benchmark 10-year Treasury up nearly 2 percent. The performance has been above 5 percent in June and July 2007, before the onset of the Great Recession in December of that year.

The embrace of fixed income funds during the recession had many benefits, said Hans Mikkelsen, credit strategist at Bank of America-Merrill Lynch. The record of 376 billion that flowed into the bond market in 2009 allowed companies to refinance its debt at cheaper rates. Without it, says Mikkelsen, many companies have failed.

"It must have been the worst run of failures we've ever seen, but it ended up being the shortest," said Mikkelsen.

Like their safe and stable drew investors to the bond funds, the recent loss of market debt is scaring them away. In four of the last five weeks, Americans have pulled more money out of bond funds than they invested, the weeks that only this year that has happened.

Nicholas Colas, chief market strategist at BNY ConvergEx, check the data regularly to monitor investment flows for any surprise. Viewing slow and steady trickle of cash in them became tedious after a while.

"Now it's like when you see a car accident," he says. "First, look and think, 'Is this really happening? And then check to see if everything is okay."

Even the world's largest investment fund has lost some appeal. 256 billion U.S. dollars of Pimco Total Return Fund, managed by the bond market guru Bill Gross, again only 1 percent per month on average, to November, according to Morningstar. That month, the bond fund lost 1.4 percent, its worst performance since September 2008. Investors pulled $ 1,900,000,000 of the fund in November, the first net withdrawal of two years.

What motivated the change? It began with a sharp drop in bond prices in mid-November, which took interest rates in the long run, even the near-record minimum. That higher borrowing costs across the board sent, because all the U.S. debt markets inspired by the bond market.

Bond prices had been rising since late August in the hope that a major program to buy bonds of the Federal Reserve could keep interest rates increase the long term. But then a series of economic reports began to raise the hope that the economy was strengthening. That led to investors start pulling money out of Treasuries.

The big hit came after President Barack Obama announced a compromise with Senate Republicans to extend tax cuts for two years and unemployment benefits for one year. The economists raised their forecasts for economic growth and bond traders began preparing for further federal budget deficit. Both spell trouble for bonds. The tax package passed last Friday, is expected to cost $ 858 000 000 000.

"All that talk about Washington's desire to maintain tight budgets just got out of the window," said Colas.

The real danger, analysts say, is whether the sale begins to feed on itself, creating a sharp jump in interest rates over time. Investors ditch bonds, pushing down prices and cause more investors to flee. "Generate more sales selling," says Cohen. "The psychology of greed and fear will never change."

Under the worst case, long-term rates shoot higher and derail the recovery. If they rise slowly, without stifling economic growth, some think the money out of bond funds will find its way into equities. That has not happened yet. The U.S. stock funds are seeing an average of $ 2.3 billion in net withdrawals a week.

Stock funds have two important trends are running in your favor.

- The right actions became less volatile after the bond market began to weaken in November, and the major indexes have been on a steady rise. Analysts say investors resealable populations of many of the same reasons that were piled in the bond: a sense of security and greed.

- Studies show tend to follow the winners. This "chase returns" benefited bond funds when they beat people, and can help lift stocks next year, says Mikkelsen. 500 of Standard & Poor's has returned 15 percent including dividends over the past year and has targeted two-year highs day after day of this month. On Tuesday, he was at the level they traded at just before Lehman Brothers filed for bankruptcy in September 2008.