Despite all the chatter about when the Federal Reserve will finally race interest rates, investors are living in the moment as a 12.4% year-to-date decline in 10-year Treasury yields has stoked massive inflows to Treasury exchange traded funds.
“Government-bond ETFs have recorded inflows $8.7 billion this year, pushing assets up by 25 percent to $34.5 billion, the largest increase of any fixed-income or equity class,” reports Cordell Eddings for Bloomberg.
Investors’ faith in ETFs holding longer-dated government bonds has been rewarded. The iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) has surged 11% this year compared to an 8.9% gain for the S&P 500.
Fixed income ETFs added $8.36 billion in new assets last month compared to $5.98 billion for equity-based funds, according to data from State Street Global Advisors, the second-largest U.S. ETF issuer. However, August was far from the first month of strong inflows to Treasury ETFs this year. [Bond ETFs Lead August Inflows]
The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) and TLT are two of the top-nine asset-gathering ETFs of any stripe this year with combined inflows north of $5.7 billion. The nearly $3.6 billion in new assets added by IEF, which has an effective duration of almost 7.7 years, is more than has flowed into equity funds such as the iShares MSCI EAFE ETF (NYSEArca: EFA) and the Vanguard Value ETF (NYSEArca: VTV).
Even with this year’s sanguine interest rate environment, some traders have not shied away from preparing for higher rates. “Traders are pricing in a 61 percent chance the central bank will increase its benchmark rate by July 2015, compared with a 53 percent chance a month ago,” according to Bloomberg.