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Treasury ETF Investors Wrong-Footed as Yields Rise


The iShares 20+ Year Treasury Bond (TLT) is down more than 4% so far in May, leaving investors who have recently piled into U.S. government bond ETFs hurt by rising Treasury yields.

For example, Treasury bond ETFs gathered $1.4 billion in the most recent week ended May 8, the most ever, WSJ.com’s MoneyBeat reports, citing Lipper data.

“The general trend has been investors becoming more comfortable that interest rates are not going to rise immediately, and looking for yield in more interest-rate sensitive investments,” said Matthew Tucker, head of fixed-income investment strategy at iShares, in the post.

Yet so far in May, yields on the 10-year Treasury notes have bounced from around 1.6% to over 1.9%. Treasury 10-year yields reached the highest level in almost seven weeks on speculation central-bank efforts to spur economic growth will curb demand for the relative safety of government debt, Bloomberg News reports. Bond yields and prices move in opposite directions.

Flow data suggests that ETF buying has been focused around the middle of the Treasury yield curve. The iShares 3-7 Year Treasury Bond (IEI) and ProShares Ultra 7-10 Year Treasury (UST), a leveraged ETF, have seen heavy inflows recently.

IndexUniverse points out that UST, the leveraged ProShares Treasury ETF, surged from $12 million to more than $833 million in one day last week. There was also a huge trade in IEI.

Also, much of the flows came in big blocks, rather than as a slow and steady stream, MoneyBeat reports.

“We have seen a number of significant-sized trades that indicate institutions–it’s not clear which ones–are doing some of this buying,” Tucker said. “In the first quarter, investors really pulled away from Treasurys with the concern they would feel the impact of rising rates. But in the second quarter, some of those fears have abated.”

iShares 20+ Year Treasury Bond


Full disclosure: Tom Lydon’s clients own TLT.