For the first time since June, exchange traded funds are dumping their fixed-income holdings in droves ahead a potential December Federal Reserve interest rate hike.
ETF investors yanked $1.2 billion from fixed-income funds in November, Bloomberg reports.
Pushing bond ETF investors out the door, the Federal Reserve is expected to announce its first interest rate hike in over a decade next month. Fed officials in their October statement hinted that it raise benchmark rates in December, and the strong October job numbers only fueled speculation that the central bank would make good on its previous remarks.
According to futures data, the probability the Fed will hike its benchmark by the December 15 to 16 meeting is 68%. based on the assumption the effect fund rate will average 0.375% after liftoff, compared to its current 0% to 0.25% range. [Massive ETF Bets Mount on December Rate Hike]
In a rising interest rates environment, older bond securities with lower yields become less attractive.
“We expect the Fed to raise interest rates in December and this is still not fully priced in,” Nick Kounis, head of macro and markets research at ABN Amro Bank NV, told Bloomberg.
So far this month, among the top ETF redemptions, the iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY) saw $1.5 billion in net outflows, SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) experienced $973.7 million in outflows, iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) lost $762.5 million in outflows, iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) shrunk by $587.5 million and SPDR Barclays 1-3 Month T-Bill (NYSEArca: BIL) saw assets drop by $552.8 million, according to ETF.com. [Bond ETFs, Duration, Maturity, and Rising Rates]
The iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG), though, saw almost $2.4 billion in net inflows so far in November. Some investors may have trimmed bets on specific or more niche bond funds to bulk up on this diversified aggregate bond ETF to diminish risk. On the other hand, AGG may have experienced large inflows on greater short interest as short sellers borrow shares of AGG.
For more information the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.