Reports of interest rate hike results in surging demand for bonds

Fears the U.S. Federal Reserve could make a policy mistake by sticking to plans to raise interest rates next year have driven investors to abandon stocks and pile into bonds in their droves, Bank of America Merrill Lynch strategists said on Friday. Government bond funds had their biggest inflows since January 2016 with $5 billion ploughed into the assets seen as safer than stocks, BAML said in a note citing flows data from data provider EPFR.

Investors dumped bank assets seen as among the most vulnerable to an economic downturn, pulling a record $3.3 billion from financial sector stocks and $2.9 billion from bank loans. The sharp reassessment of risk in markets comes after the Fed spooked investors by raising interest rates and sticking by a plan to keep withdrawing support from an economy it views as strong.