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.
The anticipation of higher interest rates has recently sparked an uptick in volatility in ETFs such as TLT. Earlier this month, TLT’s implied volatility touched its highest levels in 13 months. [Volatility in Treasury ETFs Spikes]
Investors have also added billions to total bond market ETFs that are heavy on Treasuries. For example, the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG) and the Vanguard Total Bond Market ETF (NYSEArca: BND) have added over $5.8 billion in new assets combined. AGG allocates 37% of its weight to Treasuries while BND has a 42% weight to Treasury and agency debt, according to Vanguard data.
Although Treasuries have been a popular and rewarding asset class this year, some traders have tempted fate, opting to establish bearish positions against government bonds via select ETFs. The ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT), a double-leveraged bet against longer-dated government bonds, has added $1.24 billion in new assets. TBT’s triple-leveraged rival, the Direxion Daily 20-Year Treasury Bear 3X Shares (NYSEArca: TMV), has seen inflows of $270.2 million. [For the Daring, Short Treasury ETFs]
iShares 20+ Year Treasury Bond ETF
Tom Lydon’s clients own shares of TLT and EFA.