BOSTON (TheStreet) -- The cash holdings of bond mutual funds are ballooning this year as mounting economic concerns keep managers from buying new debt, despite growing inflows from investors looking to avoid risk.The average cash stake in the 1,623 funds tracked by Morningstar ( MORN) rose to 9.8% at the end of June from 9.1% at the end of 2010, or by about $243 billion, according to Morningstar data. The average bond fund's cash position was at 10.2% at the end of 2007 and 10.1% at the end of 2008 as investors sought to avoid risk during the recession.
These concerns are stoking interest in bond funds, despite their paltry returns. The yield on a 10-year Treasury note is currently just under 3%. The Vanguard Short-Term Bond Index Fund ( VBISX), which tracks a riskier part of the bond market, yields just 0.8%. Bill Gross, manager of the Pimco Total Return Fund ( PTTAX), the world's largest bond fund at $247 billion in assets, has less than 10% of the fund's holdings in Treasuries and Treasury Inflation-Protected Securities (TIPs), according to Morningstar, a clear bet against those securities. But rising demand helped long-dated government-bond funds gain 4.5% in the second quarter, generating an average return of 2.3% this year, said Morningstar. Short-dated Treasury funds rose 1% for the quarter and intermediate-maturity Treasuries rose 2.4%. The S&P 500 index is up 5.7% this year. Overall, long-term mutual fund flows turned negative in June for the first time since December, as investors withdrew $4.5 billion from funds after May inflows of $22.6 billion. "Risk-aversion reigned as investors pulled about $18 billion from U.S. stock funds in June to mark the worst monthly outflow for the asset class since the peak of the credit crisis in October 2008," said Morningstar.
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