The Barclays U.S. Aggregate Bond Index—the broad U.S. debt index comprised largely of U.S. Treasurys that serves as a benchmark to several ETFs including the iShares Core Total U.S. Bond Market Fund (AGG)—posted its first quarterly decline in seven years, slipping slightly as U.S. stocks rallied to unprecedented highs.
The Wall Street Journal today was first to point out that the Barclays benchmark—often seen as the fixed-income equivalent of what the S'P 500 Index is to equities—edged down 0.12 percent in the first three months of the year.
The decline came amid talk investors were said to be pulling money away from portfolios tied to the benchmark, the Journal reported.
The bigger implication here is that the albeit-modest decline could amount to the first evidence of the demise of the three-decade rally in bonds. Certainly, paltry yields in long-dated U.S. government debt and expectations for higher interest rates once the Federal Reserve backs off on its quantitative easing measures don’t bode well for bond prices.
But is the endgame coming into focus?
Given cautious hopes about an improving U.S. economy, and with the Dow Jones industrial average and the S'P 500 rallying to record highs in the first quarter, speculation mounted that the Fed may have to accelerate the unwinding of its extraordinary policy measures—all of which fuels views that the bond market may be starting to move downward.
As iShares Chief Investment Strategist Russ Koesterich told the Journal, buying U.S. Treasurys today is a much more “dangerous” activity than it used to be.
From an ETF perspective, on the surface, what’s happened to the $15 billion iShares ETF, AGG, in the past three months seems to corroborate the notion that the bond rally might be showing signs of fizzling.
The fund dropped 0.12 percent on a net asset value basis in the first quarter and, while outflows hardly herald price declines in a vast index like the one anchoring AGG, investors did pull a net of $187.9 million out of it. Outflows, in this case, came hand in hand with a slumping price performance tied to the declining benchmark.
The Wall Street Journal reported that, in sum, “large investors” have pulled approximately $171 billion out of Barclays U.S. Aggregate Bond Index-linked investment vehicles in the past five years—there are some $4 trillion of assets tied to this index, which has a total market value pegged at $16.5 trillion, according to data provided by Barclays. U.S. Treasurys represent roughly 36 percent of that total market value.
To be clear, $171 billion in outflows is coming out of a universe that’s actually bigger, albeit anchored by, the Barclays index, making it safe to assume that this notion of outflows directly tied to the broad Barclays index might not be entirely accurate. In fact, a total of 27 benchmarks comprise eVestment's 'universe' here.
It’s also worth noting that since the end of the quarter—or in the past two days alone—investors have poured a net of $110 million back into the iShares ETF “AGG.” Again, flows aren’t directly linked to the price of the index, but the inflows almost erase the outflows seen in the first quarter.
What’s more, AGG’s asset gathering came as foreign central banks, such as China’s, are said to be upping their purchases of U.S. Treasurys. Such buying is hardly a sign that the bond market rally is ending.
Also noteworthy is that other ETFs that track the same Barclays index benchmarking AGG saw net inflows—not outflows—in the first three months of the year, despite the slipping performance. That suggests aggregate bond strategies are far from falling out of favor.
The $687 million SPDR Barclays Aggregate Bond ETF (LAG), for instance, attracted a net of $70 million in the first three months of the year, while the $406 million Schwab U.S. Aggregate Bond Fund (SCHZ) gathered a net of $20.8 million in the same period, according to data compiled by IndexUniverse.
In the end, it’s perfectly reasonable to wonder when the bond rally will end. But whether we are witnessing the first signs of that event is another question entirely.
At the time this article was written, the author held no position in the securities mentioned. Contact Cinthia Murphy at firstname.lastname@example.org.
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