During periods of rising interest rates, investors have generally tilted toward the short end of the bond duration curve to reduce interest rate risk.
Looking at fund flows into long-term and short-term bonds over the last four-week period, however, unfolds an unusual story, suggesting that investors believe the Fed will act less aggressively than it has repeatedly signaled.
After increasing the benchmark federal funds rate by a quarter of a percentage point, in a speech delivered to the National Association of Business Economists on March 21, Fed Chair Jerome Powell said that the Fed must move “expeditiously” to get to the neutral rate or possibly move beyond the neutral rate to a more restrictive level. Powell is not alone; other Federal Open Market Committee members have also been talking tough in recent weeks.
Despite most Fed officials projecting pushing up the rate to at least pre-pandemic levels, consistent with raising interest rates at every scheduled meeting this year, over the past four-week period, the longest-dated bond ETFs are taking in way more in flows than their short-dated counterparts.
“This is counterintuitive, as the Federal Reserve raised interest rates for the first time in years and has confirmed plans to increase rates multiple times in the remainder of the year,” Todd Rosenbluth, head of research at ETF Trends and ETF Database, said. “However, some investors seem to believe that the Fed will be less aggressive due to the geopolitical risks tied to Russia’s invasion of Ukraine.”
Short-term bond ETFs, which have $119 billion in combined assets under management, have seen a combined $255.23 million in net outflows over a four-week period, according to ETF Database.
On the other hand, long-term bond ETFs, which hold $106 billion in combined assets, have taken in $4.97 billion in net inflows during the same period, according to ETF Database.
In the short-term bond category, the iShares 1-3 Year Treasury Bond ETF (SHY) has taken in the most assets, seeing $756 million in net inflows. Second place is taken by the iShares Floating Rate Bond ETF (FLOT) with $369 million in net inflows, according to ETF Database.
Looking at long-term bond ETFs, the iShares 20+ Year Treasury Bond ETF (TLT), the second-largest in the category, is leading the pack with $4.81 billion in net new assets over a four-week period, according to ETF Database.
TLT is trailed by the Vanguard Long-Term Corporate Bond ETF (VCLT) and the SPDR Portfolio Long Term Treasury ETF (SPTL), which have taken in $634 million and $223 million, respectively, during the same period.
For more news, information, and strategy, visit ETF Trends.