Consequently, funds that hold short-term, high-quality debt are taking a hit as short-term Treasury yields have jumped since mid-October, reports Michael Aneiro for Barron’s. Bond prices and yields have an inverse relationship, so a rising yield corresponds with falling prices.
Bank of America Merrill Lynch also points to increasingly negative daily fund flows from short-term funds since last month.
“We are seeing the first signs that short duration (<5-year) high grade fund flows are reacting to the spike in short term interest rates,” BofA credit strategist Hans Mikkelsen said in the Barron’s article. “Thus since November we have seen outflows on nearly two-thirds of business days (16 of 25), and [Wednesday]’s daily outflow was $429mn – the second biggest over the past two years…. We have argued that short duration is the most crowded trade in high grade, and with short term interest rates increasing as we move toward the Fed’s rate hiking cycle, front end credit spreads are at risk due to the technical of outflows.”
Over the past month, FTSM has dipped 0.09% while SHV was down 0.02%.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.