Rate hike fears not only affected the equities earlier this week, but have also led to investors in U.S.-based funds pulling out $1.8 billion of taxable bond funds for the one week period ending Mar 11. According to data from Lipper, high-yield bond funds saw the biggest outflows since December and safe-haven U.S. Treasuries funds saw the third consecutive week of outflows.

However, mutual funds attracted $2.1 billion, the weakest in seven weeks. Nonetheless, the counterpart exchange-traded funds witnessed outflows – leading to the first overall outflows in 10 weeks. Jeff Tjornehoj, head of Lipper Americas Research said: “The retail crowd wasn't intimidated - it was really the institutional crowd that was getting skittish”.

As for the broader markets, fears of sooner-than-rate hike dragged benchmarks down till Wednesday. Markets had opened in the green on Monday, the sixth anniversary of the bull market, but the crash came on Tuesday on rate hike fears. Dollar strengthened to a multi-year high. The Dow had crashed over 330 points on Tuesday. The fears continued into Wednesday, leading to another day of losses. However, a mixed bag of economic data on Thursday helped benchmarks move significantly higher. Till close of markets on Mar 12, only the Dow was in the green for the week with gains of 0.2%. The S&P 500 and Nasdaq are down 0.3% and 0.7%.

Funds Flow Data

While funds focused on stocks outside the US attracted $5.5 billion, U.S.-focused stock funds lost $4.5 billion. This was the biggest outflows since early February. Stocks funds thus added less than $1 billion in the week ending mar 11. Meanwhile, stock mutual funds added $1.7 billion but ETFs lost $703 million.

This came after stock funds had attracted $8.4 billion for the week ending Mar 4, their biggest inflows since late December. Of these, $6.9 billion was invested in non-U.S. stock funds. U.S.-focused stock funds added $1.5 billion.

Meanwhile, U.S.-based European stock funds recorded inflows for the seventh straight week. They attracted $924 million. The 1 trillion euro ($1.1 trillion) bond-buying program commenced this week on Monday. European markets hit a seven-year high while the common currency euro plunged to a 12-year low against the dollar. (Read: Euro Collapse No Longer a Major Concern for US Companies).

Apart from $1.8 billion flowing out of taxable bond funds, the safe-haven U.S. Treasuries funds saw outflows of $1.7 billion, the third consecutive week of outflows. Meanwhile, high-yield bond funds saw the biggest outflows since December, as it lost $2 billion for the one week period ending Mar 11.

In the one week period ending Mar 4, taxable bond funds and high-yield "junk" bond funds had registered their ninth and sixth consecutive week of inflows, respectively.

On the other hand, the Investment Company Institute reported total money market fund assets were $2.69 trillion for the week ended Mar 12, up by $18.19 billion.

Markets and Key Developments This Week

Mergers and acquisition activity, and gains in industrial and technology stocks boosted markets on Monday. Investors also found a buying opportunity, after the sell off last week. Alcoa created a stir in the trading activity on Monday after announcing that it is acquiring titanium supplier RTI International Metals in a transaction valued at $1.5 billion. Separately, Simon Property Group offered to buy competitor The Macerich Company for $14.39 billion. Industrials were the biggest gainer among the 10 S&P industry groups. The Industrial Select Sector SPDR ETF (XLI) gained 0.9%.

However, rate hike fears, following last Friday’s encouraging jobs report, were back to haunt investors on Tuesday. The Dow slumped 1.9%, or 332.78 points. Euro plunged to its lowest level in almost 12 years. Concerns that an interest rate hike was in the offing combined with ECB’s monetary easing program dampened sentiment. Investors anticipated that the Fed will consider a rate hike in second half of this year as strong jobs data on domestic front suggested that labor market is improving at an impressive rate.

Markets extended Tuesday’s losses to end in negative territory on Wednesday as investors remained concerned about the possibility of a mid-year interest rate hike. Moreover, the U.S. dollar continued to gain strength against the euro and its other rivals. While, the S&P 500 and Dow finished at their lowest level since Feb 2, the Nasdaq declined to its lowest level since Feb 11.

Benchmarks snapped two-day losses to end in the green on Thursday as mixed economic data reduced fears about sooner-than-expected rate hike. Disappointing retail sales data eased fears regarding earlier-than-anticipated rate hike to some extent. The U.S. Department of Commerce reported that retail sales declined 0.6% in February to $437.0 billion. Moreover, it also dragged down the dollar. Separately, the initial claims declined in the week ending Mar 7 after hitting 10-month high in the prior week. The Nasdaq is now 108 points away from the 5K level (Read: Did the Nasdaq's Rally to 5K Not Help Your Funds?)

Euro Weakens against the Dollar: The dominating news for the week so far has been euro’s weakness and the timing of the rate hike. The euro had declined to trade below $1.06 on Wednesday, reaching its lowest level since 2003. Continuous decline in euro raised the possibility that the two currencies are moving towards parity in the not-too-distant future.

The ECB quantitative easing program that got underway on Monday also weighed on the euro. The program has pushed Eurozone bond yields to their lowest levels ever. Short-term German government bond yields are in negative territory. However, the euro’s nosedive is boosting Eurozone stocks to record levels. (Read: 3 European Stocks Gaining from Euro Collapse)

Nonfarm Payrolls Report: Markets were interestingly adversely affected following the strong jobs data, as it sparked fears about a sooner-than-expected rate hike. The year 2014 was the strongest for the labor market in the last 15 years in terms of new job additions. The unemployment rate dropped to 5.5% in February, its lowest level since early 2008. (Read: Unemployment Hits 6.5 Year Low).

Sixth Birthday of the Bull Run: It was the bull market’s sixth anniversary on Monday. The S&P 500 had hit a nadir of 676.53 points on Mar 9, 2009. The benchmark was dragged 60% down in 18 months by the collapse in the housing market and the recession. (Read: Bull Market Turns 6: Top Mutual Fund Gainers)

2 Mutual Funds to Sell

Given the fears of the rate hike, and the biggest outflows from the High-Yield Bond funds since December, we would suggest 2 such funds that should be dropped from the portfolio. Investors preferring to stay away from this category of funds amidst the rate hike fears may sell the following 2 funds that carry a Zacks Mutual Fund Rank #5 (Strong Sell). Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

Also, the funds have low total return over the last four weeks, carry sales load and have a high expense ratio. The maximum initial investment in these funds is within $5000.

Aquila Three Peaks High Income A (ATPAX - MF report) seeks high current income with growth of capital being the secondary objective. The fund may invest all its assets in high-yield/high-risk securities that are rated below investment grade. It may buy bonds of any maturity, but average effective weighted maturity should be within 1 year of the Barclays Capital U.S. Corporate High-Yield Bond Index’s average maturity.

ATPAX carries a Zacks Mutual Fund Rank #5. It has lost 0.2% over 1 week and the four-week total return is just 0.6%. It carries a max front end sales load of 4%. The annual expense ratio is 1.14% as compared to category average of 1.06%.

Rydex High Yield Strategy A (RYHDX - MF report) invests in high yield debt securities. The fund may also invest in securities which as a whole mimic the performance of the U.S and Canadian high yield bond markets. These securities may include fixed rate, non-investment grade debt through the use of credit default swaps securities.

RYHDX carries a Zacks Mutual Fund Rank #5. It has lost 1% over 1 week and the four-week total return is a negative 0.2%. It carries a max front end sales load of 4.75%. The annual expense ratio is 1.53% as compared to category average of 1.06%.