LONDON (Reuters) – German government bond yields hit their highest in nearly a month and world stocks held near 7-week lows Thursday, a day after a weak debt sale in Berlin fanned fears the euro zone debt crisis is starting to threaten its biggest > falling 115 ticks on the day to 134.66, the lowest since October 31.

Ten-year German government bond yields rose as high as 2.14 percent compared with economy.

The euro remained vulnerable near a 7-week low against the dollar as investors eyed a meeting of leaders from France, Germany and Italy for any signs of cracks in Berlin's resistance to more concerted action to end the two-year-old crisis.

Repercussions from the auction, in which Germany found no buyers for almost half of the 6 billion euros on offer, extended into a second day, with Bund futures just 1.724 percent earlier this month.

That is higher than the equivalent U.S. Treasury yield of around 1.88 percent and Japan's 1 percent, although the difference also reflects the higher benchmark interest rate set by the European Central Bank.

"I think we are moving closer to a policy response probably, which could be either more aggressive ECB action or the idea of euro bonds could gain some traction," said Rainer Guntermann, strategist at Commerzbank.

"In either case the credit of the core countries could be increasingly diluted, including also German Bunds especially when it comes to euro bonds."

German, U.S. and UK 10-year real yields — benchmark government bond yields minus consumer prices inflation rate — are in negative territory, with Japan boasting the highest real yield among the four of around 1 percent.

The MSCI world equity index was up 0.15 percent. The index has fallen 15 percent since January.

European stocks rose 0.6 percent on the day while emerging stocks also added 0.6 percent. Wall Street is closed for the Thanksgiving Day holiday.

U.S. crude oil rose half a percent to $96.60 a barrel.

The euro was up 0.3 percent at $1.3379, having fallen as low as $1.3318 Wednesday.

"It is a case of two steps down and one step up for the euro," said Carl Hammer, currency strategist at Nordea in Stockholm.

"The Bund auction got people wondering about how big German debt is and it coincided with (European Commission President Jose Manuel) Barroso talking about euro bonds.

Funding stresses for European banks escalated, with the cost to swap euros into dollars in the currency swap market rising to fresh three-year highs of 148 basis points.

The premium investors demand to hold Portuguese government bonds rather than benchmark German Bunds rose after Fitch downgraded Portugal's rating to junk status.

Citing large fiscal imbalances, high debts and large fiscal imbalances, Fitch cut Portugal to BB+ from BBB-, still one notch higher than Moody's rating of Ba2. S&P still rates Portugal at investment grade.

The dollar fell a quarter percent against a basket of major currencies.

(Editing by Patrick Graham, John Stonestreet)

BOSTON – Surging stock prices in October weren’t enough to entice mutual fund investors back into the market. Instead, bonds continued to hold appeal.

Investors withdrew a net $17.6 billion from stock mutual funds last month, industry consultant Strategic Insight said on Friday. It was the sixth consecutive month of net withdrawals, which total $97 billion over that period.

October’s retreat came as the Standard & Poor’s 500 index returned nearly 11 percent, its best month since December 1991.

Last month’s exit from stock funds appeared to be a reaction to the market decline in August and September, when stocks tumbled more than 12 percent.

“After the ups and downs of recent months, investors seem to be suffering from volatility fatigue,” said Avi Nachmany, research director with New York-based Strategic Insight.

Stock funds attracted new cash during the first four months of this year, following last fall’s strong market gains. But investors have since returned to their old ways, pulling their money from stock funds and depositing it in bond funds. It’s a pattern that became entrenched after the 2008 financial crisis.

That more conservative investing attitude was again apparent last month, when investors deposited a net $20.8 billion into bond funds.

About $18.9 billion of that total went into taxable bond funds, a category that includes corporate bonds. It was the largest monthly flow of money into taxable bond funds since May’s figure of $20 billion. About $1.9 billion was deposited last month into municipal bond funds, which buy the debt of state and local governments.

Other details of how investors moved their money in October:

• Foreign stock funds: Investors withdrew a net $2 billion from these funds, amid persistent worries that European leaders will fail to get a handle on the continent’s debt crisis. Year-to-date, investors have deposited a net $47.8 billion into foreign funds, reflecting expectations that long-term growth prospects in fast-growing countries like China will support rising foreign stock prices.

• Money-market funds: A net $21 billion was withdrawn from these funds, which are designed to be safe harbors where investors can temporarily park cash and quickly access it when needed. Net withdrawals total $215 billion year-to-date. Money-market funds’ appeal has dimmed because returns have been barely above zero since early 2009.

• Exchange-traded funds: Investors deposited a net $19 billion into ETFs, which bundle together investments in a particular market index. Unlike mutual funds, they can be traded during daily sessions just like stocks. ETFs continue to grow much faster than mutual funds, with year-to-date net deposits of $94 billion. At that rate, ETFs are on pace to top $100 billion for the fifth year in row.

FRANKFURT, Germany – The European Central Bank says it will “actively implement” a bond-purchase program that could boost Spanish and Italian bonds and drive down interest yields that threaten those countries with financial disaster.

Such purchases by the central bank could help Rome and Madrid fend off market trouble until a strengthened eurozone bailout fund is approved to help them.

Sunday’s statement comes as officials worked to ward off more turmoil as financial markets prepared to reopen on Monday after the U.S. lost its triple-A bond rating from Standard & Poor’s after market close Friday. Officials from the Group of 20 rich and developing countries also held talks aimed at minimizing market shocks. G-7 officials were reportedly to confer before markets open in Asia on Monday open as well.

The burst of activity on a Sunday in August underscored how government debt levels in Europe and the U.S. have unsettled financial markets — and sharpened fears that debt troubles could derail the global recovery from the 2007-2009 financial crisis.

The statement from the ECB, issued after a conference call among its officials, did not say which countries’ bonds it would buy.

But the beneficiaries are expected to be Italy and Spain, market analysts say. Italy and Spain are trying to avoid the spiraling interest rates that forced Greece, Ireland and Portugal to seek bailout loans. Purchases could drive up bond prices, which move in the opposite directions from interest yields.

Last week, yields for both countries were above 6 percent, moving toward the levels that upended the three smaller countries. Italy in particular is regarded as too large for Europe’s euro440 billion bailout fund to rescue, raising the possibility of a financial disaster that could devastate the eurozone economy.

Analysts at Royal Bank of Scotland said recent moves by Italy to strengthen its finances helped bring the ECB to its decision. The bank was reluctant to come to the rescue unless governments first close the holes in their finances.

The statement Sunday said it was “essential” for them to follow through on their commitments.

Italian Premier Silvio Berlusconi said last week that Italy would balance its budget in 2013, a year earlier than previously expected, and speed up other budget measures.

“The ECB will start a large scale bond buying of Italian and Spanish sovereign bonds on Monday morning in our view as euro area governments have signed up to additional fiscal measures where needed,” they said.

They said the purchases could run euro2.5 billion ($3.5 billion) a day and “will stop the collapse of the bond market in countries under stress.”

Italy has debt equivalent to 120 percent of annual economic output, the second highest in the eurozone behind Greece, and weak prospects for economic growth that would help pay it down.

Sunday’s meeting comes just hours before the opening of financial markets in Asia, after Friday’s downgrade of the U.S. credit rating from AAA to AA plus by ratings agency Standard & Poor’s has led to fears of more stock market plunges.

Last week already saw markets around the world deep in the red amid fears the global economy may be weakening and the uncertainty created by Europe’s sovereign debt crisis.

In a sign of early fallout, Middle East markets tumbled Sunday on the first day of business after the downgrade.

Middle East markets, open Sunday through Thursday, were the first to react to the downgrade. Egypt’s benchmark EGX30 index fell more than 4 percent, and other Gulf markets also were sharply lower.

Israel’s Tel Aviv Stock Exchange delayed the start of the week’s first session after pre-market trade showed the benchmark index dropping more than 6 percent because of concerns over the U.S. debt rating cut. Exchange spokeswoman Idit Yaaron said the start was pushed back by 45 minutes “so market players will have time to react logically and not under pressure.”

Israel’s benchmark TA-25 index plunged 7 percent to close at 1,074 points.

U.S. markets and others reopen Monday but have had rough patches recently. The Dow Jones industrial average dropped 512 points Thursday, its worst performance since the financial crisis of 2008, and regained only a fraction of that drop Friday.

Many economists see the world’s big central banks as the last line of defense at this moment in the crisis, after policymakers in Europe and the U.S. have failed to agree on the kind of shock-and-awe moves that many investors demand.

Investors have also been calling on the U.S. Federal Reserve to start pumping money into the American economy again to help underpin the slowing economic recovery.

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Mari Yamaguchi reported from Tokyo. Kelly Olsen in Seoul, South Korea; Adam Schreck in Dubai; and Christopher Bodeen in Beijing contributed to this report.

TOKYO (Reuters) – The Japanese government plans to issue 10 trillion yen ($128 billion) in reconstruction bonds and cut spending by 3 trillion yen to pay for more projects to rebuild the devastated northeast, the Nikkei business daily reported on Sunday.

Investors are counting on reconstruction spending to help the world’s third-largest economy pull out from a slump caused by a massive earthquake and tsunami in March and to resume moderate growth in the third quarter.

A government source told Reuters last week it was planning additional spending of 13 trillion yen for reconstruction projects, on top of a combined 6 trillion yen already set aside in two extra budgets.

The source had said the government was considering issuing special bonds, scaling back other spending plans and selling national assets. The Ministry of Finance was planning on five-year bonds, with the government considering raising taxes to repay them, according to the source.

The Nikkei said about 8-9 trillion yen of the 13 trillion yen would be spent to improve infrastructure, while 3 trillion yen would go toward building schools and creating jobs.

The draft blueprints for the government’s reconstruction projects will be finalized this month by a reconstruction task force headed by Prime Minister Naoto Kan, the paper said.

(Reporting by Chang-Ran Kim; Editing by Yoko Nishikawa)

NEW YORK – The safest corporate debt isn’t looking so smart anymore.

Companies deemed good for the money are raising trillions selling bonds to investors who can’t seem to get enough of them. It looks like a great deal for both parties — until you consider the details.

Some bonds are throwing off interest so puny that investors are already losing money to inflation. Others pay higher rates but won’t return your money for more years than you’re likely to live. Johnson & Johnson just sold $4.4 billion worth of debt with fixed rates as low as 0.7 percent, 2.5 percentage points less than inflation. The prospect of near-free money was so irresistible to Google Inc., it decided to sell $3 billion worth, even though it already had more than 10 times as much cash at its disposal. And Norfolk Southern Corp. convinced investors to lend it $400 million for 100 years.

“When companies start putting out 100-year bonds, you can bet we’ve hit lows,” says Richard Lehmann, a Miami money manager with $100 million under management. He has largely shunned investment grade corporate bonds. “This market has gone from stupid to ridiculous.”

Stocks were the primary target of the Federal Reserve Chairman Ben Bernanke’s attempt to push people out of Treasurys into riskier assets. But corporate IOUs that earn top grades from rating agencies have been on a tear, too — returning 31 percent in two years. That has allowed Corporate America to put trillions of dollars in their coffers and has sent billions of dollars to Wall Street banks who help them arrange the deals.

This has been good for the economy. But investors are another story.

“What happens when these securities return to normal valuations?” says Thomas Atteberry, who oversees the FPA New Income fund with $3.7 billion in assets. “It’s not going to be a pretty picture.”

The average investment grade corporate bond currently pays 3.73 percent in interest a year, barely more than the current rate of inflation, 3.2 percent. It’s only the second time in two decades that the yield has fallen below 4 percent, according to Barclays Capital. If inflation rises, as many fear will be the outcome of current Fed policies, it will eat away at the buying power of the principal that is returned to bond holders upon maturity. That could turn winning bets into losing ones.

On first blush, Norfolk Southern bonds maturing in 100 years might seem to offer a good defense against the prospect of rising prices. Its bonds are paying 6 percent a year, well above inflation. But inflation can gyrate wildly. Prices have climbed as high as 18 percent annually in the past 100 years. Even at current inflation rates, cash stashed in a coffee jar would lose half its buying power in just 22 years.

Of course, the bigger question might be whether the railroad company will even be around in 2111 to pay anything back. A hundred years ago, the Austro-Hungarian Empire ruled over millions of people and investors held plenty of stock in Colorado Fuel & Iron. Gone are the empire and the stock. Colorado Fuel & Iron was a member of the most stable of Wall Street offerings — the Dow Jones Industrial Average. That is, before it went bankrupt.

“I wouldn’t buy a hundred-year bond of anything,” says David Sherman of Cohanzick Management, a money manager that is shorting investment grade bonds. “Nothing good can happen to you in that amount of time.”

To be fair, many owners of so-called century bonds aren’t human beings who won’t live to see their money returned. They’re pension funds and insurers with a good idea of how much they’ll have to pay retirees and heirs in the future. Those groups want a predictable stream of income from bonds to make good on those commitments. Adding to the appeal of investment grade bonds: Regardless of maturity, they typically don’t rise and fall in price as sharply as other assets like stocks. They also rarely default, delay interest payments or stop them altogether. As the recovery continues apace, companies issuing bonds defaulted on just 1.3 percent of what they’ve borrowed, according to Moody’s Investors Service.

That could be good for investors if the market hadn’t already reflected the lower defaults. In buying bonds, pros like to look at how much more they’re getting paid in interest over what they’d get if they held Treasury bonds. The thinking is that U.S. government securities already reflect the possibility that inflation could eat into their return and so any additional interest that corporate bonds promise to pay is compensation for the risk that companies will fall on hard times and won’t pay it at all.

That extra compensation stood at a little over half a percentage point last month, one of the stingiest offered in a quarter century. Even more unsettling, consider that the Federal Reserve has become the biggest buyer of Treasurys in its effort to drive interest rates down and revive the economy. It holds $1.4 trillion of them, more than triple what it held three years ago. To critics, Treasury prices and their rock-bottom yields reflect manipulated demand for them.

In other words, corporate bonds may be doubly overpriced — overpriced relative to something overpriced.

These bonds continue to attract money partly because many mutual funds that focus on bonds feel they must invest in them no matter what the price. No one can guess when bonds could tumble but if a fund sells them and they don’t drop right away, it’s sure to lose investors to rival funds that didn’t sell and are still collecting interest and posting higher returns — for now.

“You have to dance until the music stops,” says FPA’s Atteberry, echoing a now infamous line from former Citigroup CEO Chuck Prince as to why he was making risky bets in the run-up to the financial crisis. “But if you look around the room, there’s 20 people and one exit door. Not everyone is getting out.”

How bad could things get in a rush to sell? Atteberry says if fearful investors suddenly demanded just a half percentage point more in yield to compensate for inflation, it would wipe out any gains for buyers at today’s yields. If investors today received the kind of margin of error they normally demand, 10-year corporate bonds would be paying 7 percent a year — more than 3 points higher than they are now, he adds.

David Wright of Sierra Core Retirement Fund is just as critical of the almost willful ignorance of risk by investors. But he’s buying. He says bears are ignoring the appeal of investment grade bonds as refuges of safety in the troubled times he sees ahead. Wright says investors are courting danger in myriad other assets such as stocks, which he thinks could fall as much as 35 percent over the next nine months.

“There’ll be a shift from complacency to anxiety to fear,” Wright says. “And they’ll gradually move into these safe haven assets.”

Or so they’re called.

BANGALORE (Reuters) – The Securities and Exchange Commission is investigating whether Wall Street firms sold a complex type of bond without clarifying the risks attached to it, the Wall Street Journal said, citing people familiar with the matter.

The financial product known as “reverse convertible notes” pays interest but also is tied to the performance of an underlying stock, so if the stock falls, investors could lose money, the WSJ said.

The regulators are also looking into the disclosures of potential conflict of interest, such as a bank selling a note linked to the stock of a company it is advising, the newspaper said.

In addition, Wall Street regulator Financial Industry Regulatory Authority was likely to impose a large fine against a brokerage firm for improperly selling reverse convertible notes, the WSJ said, citing people familiar with the matter.

But the newspaper said the companies being targeted by FINRA could not be determined, and it was not clear whether the SEC’s investigation would result in civil charges against underwriters or sellers of the notes.

A spokesman for the SEC and a spokeswoman for FINRA declined to comment to the Wall Street Journal.

The SEC and FINRA could not immediately be reached for comment.

(Reporting by Megha Mandavia. Editing by Jane Merriman)

PROVIDENCE, R.I. – Federal regulators are investigating Rhode Island’s bond offerings, adding it to the list of state and municipal governments to come under scrutiny by the Securities and Exchange Commission.

State General Treasurer Gina Raimondo said Thursday that the SEC told her Monday that it had “opened an investigation relating to the state’s bond offerings.” She said the SEC gave her no additional details about the probe, and it had not yet requested any information from her office.

The SEC is already investigating how Illinois reports pension costs to bond investors, and looking into whether Harrisburg, Pa., provided appropriate information to bond investors. New Jersey was the first state ever charged for violations of securities laws and settled last year without admitting or denying the allegations. The SEC said New Jersey did not give municipal bond investors enough information to fully assess the state’s financial picture.

Elaine Greenberg, chief of the SEC’s municipal securities and public pensions unit, said in August that the agency wants to make sure states and municipalities are adequately disclosing their pension fund liabilities. When the unit was established about a year ago, SEC officials said one of the primary areas it will focus on is accounting of public employee pensions and disclosure violations.

The size of a state or municipality’s unfunded pension liability can affect its bond rating, and make it more or less expensive to borrow money. A larger unfunded pension liability means more risk for investors.

It appears the SEC is stepping up its enforcement efforts amid concern among investors about the fiscal health of state governments and municipalities, said municipal bond market analyst Matt Fabian, a managing director at MMA Research.

“Municipal governments are in the news every day. There’s ongoing budget crises this year. Medicaid next year. Pension funding for the next two decades,” he said. “They are attempting to improve disclosure this way.”

Rhode Island has a projected unfunded pension liability of about $4.7 billion, Raimondo’s office said.

Raimondo, a Democrat who took office last month, told The Associated Press that because the SEC has given her so little information, it is not clear to her whether the investigation focuses on Rhode Island’s unfunded pension liability and how it is disclosed to those who buy bonds issued by the state. But she said she wasn’t surprised by the SEC’s call Monday because Rhode Island is one of many states with precarious finances and a large unfunded pension liability.

In Washington, SEC spokesman John Nester declined to comment.

Fabian said he believes it’s likely the SEC is investigating whether the state gave a misleading picture of its pension funding when it sold bonds. He cited a case the SEC settled last year with four officials in San Diego, who paid fines of $5,000 to $25,000 and admitted they misled investors about the city’s pension and retiree health debts in municipal bond sales.

Fabian said that in the short term, such investigations can create uncertainty among investors, but said it was a net positive in the long term.

“Better information, better disclosure would improve the market,” he said.

Raimondo said her office would cooperate fully with the investigation, and a spokesman for Gov. Lincoln Chafee, an independent, said he was monitoring the situation.

Raimondo’s predecessor, Frank Caprio, a Democrat who ran for governor last year and lost, did not immediately return a phone message seeking comment.

Earlier on same day she got the call from the SEC, Raimondo launched a review of her department, including how it makes disclosures to bond investors. She said at the time that the state’s current bond disclosures are in good shape, but there is room for improvement.

She said that regardless of the probe, she has already begun to work to improve Rhode Island’s disclosures to investors, and she said the disclosures will be better when the state makes its first bond offering this year under her watch.

“I think the state can do a better job of providing greater disclosure around its unfunded pension liability,” she said. “The state needs to be able to access the bond market in the years to come on the most favorable terms possible. It is critical to present a complete picture of our finances to potential bond investors.”

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AP Business Writer Marcy Gordon in Washington contributed to this report.

BOSTON – Mutual fund investors were buying stock funds at the end of 2010. But they were trying to avoid risk through most of the year, as bond funds took in money at the second-fastest annual rate ever.

A tally Wednesday by industry consultant Strategic Insight shows investors added $222 billion more to bond funds than they withdrew. The record for money flowing into bond funds came in 2009, when investors added a net $350 billion. That followed a year when stocks suffered their worst decline since the Great Depression.

Investors responded by seeking the relative safety of bonds. But with the economic recovery gaining momentum, fear of rising interest rates has recently cut into bond returns. Two-thirds of the bond fund categories tracked by Lipper Inc. suffered losses in the fourth quarter, as rate fears sent bond prices down and yields up.

Investors typically sell off when prices fall, and December was no exception. Investors pulled a net $24 billion from bond funds last month, according to Strategic Insight. It was the biggest monthly movement out of bond funds since the peak of the financial crisis in October 2008. It was also the second consecutive month that more money was pulled out of bond funds than came in. About $1 billion exited in November.

But Strategic Insight isn’t ready to declare that investors are ready to give up on bonds. Research Director Avi Nachmany said his New York-based company still expects demand to rebound in the first half of this year. That’s because many categories of bonds offer attractive yields compared with those of bank accounts and money-market funds, which are near record lows.

“For some, the focus on income and risk aversion will persist through 2011,” Nachmany said.

Many bond investors nevertheless embraced risk last month. Flows were positive for high-yield funds, which hold bonds that typically earn high rates of return, with greater risk of volatility. Those funds returned an average 3.5 percent last quarter, according to Lipper.

That compares with an 11.4 percent fourth-quarter gain for the average U.S. stock fund.

With such strong returns, flows into stock funds have recently begun to shift. For the full year, investors added a net $23 billion into stock funds.

Yet despite an average 17 percent return last year for the average U.S. stock fund, they weren’t attracting money. They saw nearly $49 billion flow out. The overall flow of money was positive for stock funds because investors were putting their money in foreign stock funds, which drew in a net $72 billion.

There’s been a flow of money into foreign stock funds for seven straight months. This reflects the stronger economic growth prospects many investors see in the world’s emerging markets, and a desire to diversify portfolios beyond U.S. financial markets.

Still, there are signs that U.S. investors are warming up to domestic stocks. Through most of 2010, the rate at which cash was pulled out of U.S. stock funds slowed. For one week in late December, flows into U.S. stock funds even turned positive, according to the Investment Company Institute, an industry association.

“It is clear that stock investor sentiment is slowly improving,” Nachmany said.

NEW YORK – A surprising jump in hiring sent bond prices lower and lifted the dollar Wednesday. The Dow Jones industrial average edged higher for the third day in a row.

A survey from payroll processor ADP found that private companies added 297,000 jobs last month, far above the 100,000 economists expected. The report is the first chance for investors to see how strong the job market was in December.

The next look comes Friday morning when the Labor Department releases its monthly report on total U.S. payrolls and the unemployment rate. Economists expect the rate will dip to 9.7 percent from 9.8 percent.

The unexpectedly high jobs survey from ADP suggests that the Labor Department report will also be strong. But economists cautioned against reading too much into the ADP figures, which also take into account weekly figures on claims for unemployment insurance, said Thomas Simons, market economist at Jefferies & Co.

“When the ADP number comes in strong, it doesn’t mean all the other labor reports will come in strong,” Simons said. “But it does show that the labor market is improving. You have to take all these numbers together and come up with a mosaic view.”

Signs that the economy is improving weakened demand for low-risk investments. Treasurys prices slid, pushing their yields higher. The yield on the 10-year Treasury note rose to 3.49 percent from 3.33 percent late Tuesday. The yield helps set interest rates on many kinds of loans including mortgages.

The higher rates in the Treasury market helped push the dollar up against other currencies. The dollar rose 1.1 percent against an index of six other currencies.

The Dow gained 35 points, or 0.3 percent, to 11,727 in afternoon trading.

The Standard & Poor’s 500 index rose 6, or 0.5 percent, to 1,276. The Nasdaq rose 16, or 0.6 percent, to 2,697.

Financial companies led the 10 groups that make up the S&P index with a 1 percent gain. Utilities did the worst, losing 0.7 percent.

American Express Co. rose 2.8 percent to $44.98, the largest increase among the 30 stocks that make up the Dow. Intel Corp. had the largest fall, slumping 0.9 percent to $20.96.

A survey from the Institute for Supply Management showed that service companies reported more new orders and higher prices last month. The ISM’s monthly index measuring the economic strength of U.S. service providers rose to its highest level since May 2006.

Service providers such as retailers, hotels, banks and construction companies employ about 80 percent of the country’s work force. But their growth has lagged behind manufacturers since the recession ended June 2009.

Qualcomm Inc. rose 2 percent to $52 after the technology company said it had agreed to buy chip maker Atheros Communications Inc. for $3.2 billion in cash. The deal is aimed at giving Qualcomm, which makes chips for cell phones, a foothold in the growing market for tablet computers.

BJ’s Wholesale Club Inc. fell 1.8 percent to $46.15 after the retailer said it would cut jobs and close five stores.

NEW YORK (Reuters) – Money flows to global equity and other stock funds accelerated during the fourth quarter, signaling a possible twist in 2011 from the record investments made in bond portfolios over the last year, according to a report published by EPFR Global on Friday.

Funds focused on the United States, Japan and other developed market stocks collected $28.44 billion from investors for the fourth quarter, marking a significant shift from full-year data that showed outflows of $62.36 billion, the report said.

Overall, EPFR Global-tracked equity funds took in $30 billion in 2010 for their best year since 2006, led by a record $92 billion earmarked for emerging market stock portfolios, it said.

“Emerging markets will stay strong but you will see a lot more interest in domestic stocks” in 2011, said Keith Springer, president of Springer Financial Advisors in Sacramento, California. The United States will likely lead developed nations in terms of return, he predicted.

“Individual investors are starting to be a little nervous about missing the upside in stocks” after dedicating much of their portfolios to bonds over the past few years, he said.

The year is also ending with record flows into global and emerging market bond funds as well as commodity and real estate funds, the report said.

Global bonds saw inflows of $372.46 billion this year — including $29.81 billion in the fourth quarter — compared with $302.65 billion in 2009, EPFR said. But they posted outflows in the past six of seven weeks for their poorest showing since the financial crisis deepened in late 2008, it said.

“The fund groups that set records were, however, not necessarily the ones that will carry momentum into the new year,” EPFR Global said in a statement.

U.S. bond funds saw $7.3 billion fall away in the last quarter amid concerns over the fiscal health of towns, cities and public works, EPFR said. U.S. bond funds drew $178.40 billion this year, down from $214.09 billion the year before.

Specific sectors showing greater investor interest include equity funds focused on Japan and Europe the Middle East and Africa, EPFR said. Financial, technology and balanced funds also saw flows accelerate in the fourth quarter, it added.

For the second straight year, commodities funds led inflows among sectors, with $29.33 billion, EPFR said. In 2009, the sector took in $19.95 billion.

Commodities ended the year with another week of inflows as copper prices climbed to new highs, EPFR said.

(Editing by Gary Crosse and Leslie Adler)