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Bond mutual funds and ETFs have seen massive outflows this month as prices continue to slide since the Federal Reserve chairman started the ‘taper talk’ on May 22, 2013.  As a result, yield on the benchmark 10 year Treasury note spiked to 2.64% yesterday--its highest level since August 2011.

According to Trim Tabs Investment Research, bond mutual funds shed $39.9 billion this month through to June 18, while bond exchange-traded funds lost $7.3 billion for a total outflow of $47.2 billion. The previous record outflow was $41.8 billion In October 2008.

Massive outflows are beginning to impact bonds prices as many portfolio managers are now forced to sell bonds to meet redemptions. (Read: QE Tapering could make these bond ETFs winners)

While long-term treasury bond ETFs have been the worst hit by the ‘taper talk’, the sell-off has hit almost all categories as can be seen from returns over the past one month.

Long-term Treasury Bonds

TLT

iShares Barclays 20+ Year Treasury Bond

-6.81%

Investment Grade Corporate Bonds

LQD

iShares iBoxx $ Invest Grade Corp Bond

-6.70%

High Yield Bonds

JNK

SPDR Barclays High Yield Bond

-3.10%

Municipal Bonds

MUB

iShares S&P National AMT-Free Muni Bond ETF

-3.10%

However bond losses seen in past few weeks are still very low compared with the losses seen in 2008 at the height of the financial crisis.

The Bank for International Settlements (BIS), estimates that bondholders in the US could lose about $1 trillion or about 8% of US GDP,  if bond yields increased by about 3% across the maturity curve.

In addition to bonds, other interest rate sensitive assets and high dividend payers have also been hit. High dividend paying sectors like utilities and telecom saw huge interest earlier in the year as investors continued to search for yield in the ultra-low interest rate environment. No wonder these ‘bond substitutes’ came under pressure in anticipation of rise in interest rates. (Read: Sector ETFs to profit from rising rates)

Where do investors go?

So far, the money flowing out of bonds is not going into equities or other asset classes. Buyers are very hesitant given the sell-off seen in almost all asset classes. Concerns about China’s economy and liquidity crunch are further adding to investor worries.

On the other hand, some investors are using this sell-off as a buying opportunity and investing in stocks/sectors that may see brighter prospects once the economy starts growing. Financials, Information Technology and Consumer Discretionary sectors are worth a mention.

Regional Banks look pretty good at the moment and are poised to outperform in the steepening yield scenario. Investors could consider PowerShares KBW Regional Banking ETF (KBWR - ETF report), Zacks Rank #1 (Strong Buy) ETF. (Read: Winning ETF Strategies for the Second Half)

For investors looking for some fixed income exposure, floating rate bond ETFs or senior loan ETFs could be interesting. Floating Rate ETFs SPDR Barclays Capital Investment Grade Floating Rate ETF (FLRN - ETF report) and Senior Loan ETFs like PowerShares Senior Loan Portfolio (BKLN - ETF reporthave become increasingly popular with investors of late.

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