Last week, the yield spread between 2- and 30-year Treasuries reached 342 basis points, its widest on a closing basis since August 2011 and yields on benchmark 10-year Treasury bonds rose over 10 basis points, touching 2.74% Thursday before dropping back to 2.63%. Yields were on the rise again Monday, closing at 2.67%, indicating that concerns linger about rising interest rates.
Supporting that notion are inflows data that indicate investors have been turning to short-duration bond ETFs as a way of coping with rising rates. High-yield corporate bond ETFs, which usually have shorter durations than government bond funds, hauled in $2.6 billion in assets last month, according to inflows data from BlackRock. [Treasury ETFs Soften on Jobless Claims]
Further cementing short-duration ETFs as the place to be in the fixed income universe are this year’s two most popular bond funds. The Vanguard Short-Term Bond ETF (NYSEArca: BSV) and the PowerShares Senior Loan Portfolio (NYSEArca: BKLN) are the only bond ETFs on the list of this year’s top-10 asset-gathering ETFs. Conversely, four bond funds are on the list of 10 worst outflows. [Short Duration High-Yield Bond ETFs in Sweet Spot]
As of the end of July, BSV had taken in $3.69 billion this year while BKLN, the first ETF offering exposure to senior loans, had attracted $3.49 billion. Duration is the measure of a bond’s sensitivity to interest rate increases and both funds fit the bill as “low duration” plays. BSV has an average duration of 2.7%, meaning the fund should fall 2.7% if interest rates rise 1%.
A combined 88% of BKLN’s 131 holdings are rated BB or B on the Standard & Poor’s ratings scale, indicating BKLN qualifies as a high-yield bond fund. Although there is credit risk associated with junk bonds, investors favored high-yield loans as Treasury yields rose in June. Loans do provide some buffer against rising rates, but in exchange for that protection, investors must accept credit risk. [Bank Loan or Junk Bond ETFs for Yield]