Treasury ETFs Fall: ‘Great Rotation’ from Bonds to Stocks?

January 25th at 10:40am by John Spence

The iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca: TLT) was down more than 1% on Friday for its third straight day of losses. The fund is being hurt by rising Treasury yields amid talk of a “Great Rotation” from bonds to stocks as the S&P 500 nears its all-time high.

Bonds have enjoyed a bull run of more than three decades and yields have been pushed to near record lows in the aftermath of the financial crisis. However, rising interest rates would eat into bond prices and punish investors who have piled into fixed-income funds and ETFs. [Bond ETF Investors Overconfident After 30-Year Rally?]

Some analysts think rising bond yields and stocks would trigger an avalanche of sideline money tumbling into equities. [Investors Bullish on Stock ETFs]

“Sure enough, we’ve seen historic fund flows into equity funds already in 2013 – but surprisingly, bond funds haven’t seen big outflows,” reports Matthew Boesler at Business Insider. “For a while now, BofA Merrill Lynch Chief Investment Strategist Michael Hartnett has been out in front of the rest touting the ‘Great Rotation’ theme for 2013 – and he says it’s already begun.” [Fixed-Income ETFs to Avoid the ‘Ticking Time Bomb’ in Bonds]

In a research note this week, Hartnett said the past seven years have seen a “Great Divergence” in terms of fund flows.

“Investors have poured $800bn into bond funds and redeemed $600bn from long- only equity funds. But recent data show the first genuine signs of equity-belief in years,” he wrote, according to the Business Insider report. “The past 13 days have seen $35 billion come back into equity funds.”

Indeed, the BofA Merrill Lynch strategist said Federal Reserve tightening fears and the return of confidence and healthy growth in the U.S. risks setting off a “bond crash” comparable to 1994, reports Ambrose Evans-Pritchard at The Telegraph.

Hartnett said the rotation under way from bonds into equities closely tracks the pattern of 1994, with bank stocks leading the way. The rush of cash into equity funds creates the risk of an unstable “melt-up” in stocks over coming months, according to the report.

iShares Barclays 20+ Year Treasury Bond Fund

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Full disclosure: Tom Lydon’s clients own TLT.

The opinions and forecasts expressed herein are solely those of John Spence, 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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