Treasury ETF Outflows Could Foreshadow Higher Rates

ETF Trends

After sinking billions of dollars into exchange traded funds holding U.S. Treasuries in January and February, investors are having second thoughts.

Early this month, Nicholas Colas, chief market strategist at ConvergEx Group, a global brokerage company based in New York, said “Of the $14.2 billion in total ETF inflows (and $18.3 ex-SPY) for February, bond ETFs have garnered $17.4 billion of those flows. Which is to say: essentially all of them.” [ETF Underdogs on the Rise]

With March ending today, it is fair to say that as the third month of the year unfolded, investors started having second thoughts about Treasury ETFs. “Investors pulled $10.3 billion in March, the biggest exodus since December 2010,” report Cordell Eddings and Jessica Summers for Bloomberg.

The $7.8 billion iShares 1-3 Year Treasury Bond ETF (SHY) lost nearly a third of its assets alone this month, according to Bloomberg, as fixed income investors appear to be betting Federal Reserve Chairwoman Janet Yellen will raise interest rates soon after the central bank ends its quantitative easing program.

Year-to-date, two bond ETFs – the Vanguard Total Bond Market ETF (BND) and the iShares 1-3 Year Credit Bond ETF (CSJ) – rank among the top-10 asset-gathering ETFs. Just one bond ETF – the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) – ranks among the 10 worst ETFs in terms of outflows. [Short Interest in Junk Bond ETFs Soars]

But in March, the three ETFs that suffered the worst outflows were all Treasury funds, according to Bloomberg. Bond investors are flocking to high-yield fare, though. Over the past 30 days, the PowerShares Senior Loan Portfolio (BKLN) has hauled in $424.5 million, gathering more assets over that time than any other PowerShares ETF, according to issuer data.

Investors have also shown a taste for international bonds, including high-yield fare. The SPDR International High Yield Bond ETF (NYSEArca:IJNK) is not even three weeks old and already has nearly $45 million in assets under management.

On expectations the European Central Bank could unleash its own quantitative easing program, investors have allocated capital to the iShares Global ex USD High Yield Corporate Bond ETF (HYXU) and the Market Vectors International High Yield Bond ETF (IHY) , both of which are heavy on European junk bonds. [Europe's Junk Bond Market a Boon for These ETFs]

The Vanguard Total International Bond ETF (BNDX) has brought in over $55 million since the start of March. International bonds are usually less sensitive to changes in U.S. interest rates than are U.S. Treasuries.

PowerShares Senior Loan Portfolio

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ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of HYG.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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