Oil shock drives some investors back to bond funds

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The jump in crude oil prices has been good for the bond mutual fund business.

Apparently seeking relative safety, investors pumped a net $4.45 billion into taxable bond funds in the seven days ended Feb. 23, the largest one-week inflow since late October, the Investment Company Institute reported Wednesday.

Also, net outflows from tax-free municipal bond funds slowed dramatically in the period ending Feb. 23, to $556 million -- the smallest weekly muni outflow since late November.

Fund net cash flows measure new purchases minus redemptions. So an increase in inflows or a decrease in outflows can mean more buying, less selling, or a combination of the two.

Wall Street watches fund cash flows for an indication of individual investors’ sentiment toward the markets. Since early January, investors overall have been boosting their purchases of domestic stock funds while cutting back on bond fund purchases -- a reversal of the trends in place for most of last year.

The shift toward stocks and away from bonds had been fueled in part by expectations that the U.S. economic recovery would gain momentum this year. In that kind of environment stocks would be expected to beat bonds.

But oil’s surge last week raised fresh doubts about the economy and triggered a modest sell-off in stocks. That was enough to tilt some investors back toward bonds.

Even so, domestic stock funds still had a net inflow of $1.5 billion in the seven days ended Feb. 23, ICI data show. The question is whether the oil shock is enough to scare many investors into giving up on stock funds once again, sending the funds back into persistent net redemptions.

So far, oil’s jump hasn’t taken much of a toll on major stock indexes. The Standard & Poor’s 500 index, which edged up 0.2% to 1,308.44 on Wednesday, is down 2.6% from its 2 1/2-year closing high of 1,343.01 reached Feb. 18.

By contrast, oil has rocketed nearly 19% since Feb. 18, to $102 a barrel now.

Faith in the economic recovery faces a big test on Friday, when the government will report on February job growth.

-- Tom Petruno