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Investors Selling Bond ETFs as Rates Rise


Treasury yields have been rising sharply since the end of April, and some of the ETFs with the heaviest redemptions are bond funds. In particular, investors are selling fixed-income ETFs tied to Treasury Inflation Protected Securities and corporate bonds, both investment grade and high-yield.

Indeed, bond ETFs are losing strength as investors see an end to the three-decade long Treasuries bull rally and shift into the equities on the improving economic conditions.

The benchmark 10-year Treasury yield is up to 2.53% from a 2013 low of 1.61% on May 1, reports Susanne Walker for Bloomberg. Meanwhile, the aggregate earnings yield of stocks in the S&P 500 Index was 6.4% of the index’s price level.

To put this in perspective, the differential between equity and bond yields show an average 1.9 percentage point gap since 2000.

After the Fed hinted at tapering its monthly bond purchasing plan later this year, investors are pulling out of Treasuries. In the week ended June 5, investors pulled $9.1 billion from fixed-income mutual funds and ETFs – the second-highest total in over 20 years, according to Lipper data. [iShares: Fed Tapering Won’t Cause a Bond Market Armageddon]

“The lost decade for bonds has begun,” Howard Ward, the chief investment officer at Gamco Investors Inc., said in the article. “Stocks are likely going to be the asset class of choice over the course of the next 10 years. Now that the tide has turned and the economy is doing better, investors in bonds are going to have a hard time making any money.”

Currently, JPMorgan Chase & Co, Barclays Plc, Bank of America Corp., Morgan Stanley and Goldman Sachs Group are recommending stocks over most bond picks.

The global economy is “in the early stages of the recovery of the equity culture and perhaps the end of a 30-year growing love affair” with bonds, Jim O’Neill, former chairman of Goldman Sachs Asset Management, said. “When the game starts to change with central banks, it is inevitable bonds are going to suffer.”

Some analysts are anticipating a surge into equities after the short-term volatility associated with the Fed tapering.

“We still haven’t seen the real rush to equities,” Lazlo Birinyi, president of Birinyi Associates Inc., said. “We’re still confident this market has a long ways to go.”

The iShares Barclays 7-10 Year Treasury Bond Fund (IEF) lost 4.6% over the past month and the iShares Barclays 20+ Year Treasury Bond Fund (TLT) declined 7.8%. Meanwhile, the SPDR S&P 500 ETF (SPY) fell 4.3% over the last month and the SPDR Dow Jones Industrial Average ETF (DIA) dropped 3.6%.

For more information on the fixed-income market, visit our bonds ETFs category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own TLT and SPY.

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.