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INVESTORS STEPPING UP WITHDRAWALS FROM FUNDS HOLDING GOVERNMENT BONDS

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As the Treasury prepares to sell $40 billion in government bonds at its quarterly auction this week, small investors are stepping up their withdrawals of money from mutual funds holding Treasury and other government issues, according to data gathered for Money magazine's Small Investor Index.

Last year, many investors moved out of certificates of deposit yielding 2 percent to 3 percent into government bond funds paying 6 percent or more. This year, they saw the value of their holdings drop as much as 15 percent when soaring interest rates hammered bond prices. In response, they unloaded their shares.Investors withdrew $938 million from government bond funds in July, after taking out $631 million in June, according to the Bond Fund Report newsletter in Ashland, Mass. For example, the Kemper U.S. Government Securities Fund, with $5.4 billion in assets and a 4.6 percent yield, has been hit by redemptions of $108 million since July 1 on top of $91 million in withdrawals in June.

These withdrawals may lower demand at the Treasury auction, forcing the government to pay higher yields, says Louis Ehrenkrantz, president of the investment advisory firm of Ehrenkrantz King Nussbaum in New York City.

Analysts agree that most income-oriented investors are right to shun government bond funds now. "With inflation and interest rates rising, bond funds will be the worst-performing investment over the next few years," he says.

Last week, the Money Index, which tracks the typical investor's holdings, rose $334 to $45,874. Stocks gained $214, and bonds added $117.