When Investing in Treasuries, Duration Matters | ETF Trends

The collapse and Federal receivership of Silicon Valley Bank came suddenly after 44 hours of numerous redemptions from its customer base. Exacerbating the problem was that SVB was not liquid since it had taken tens of billions of dollars from venture capital clients and put that money into longer-duration Treasuries.

“It doesn’t seem that their cash was managed properly,” said VettaFi’s vice chairman Tom Lydon in an episode of “ETF Prime,” noting that a major reason why SVB collapsed was because the bank “bought longer-dated Treasuries and at the same time were seeing redemptions, which was not a good mixture.”

“[B]eneath the surface were severe losses on long-term bonds, snapped up during that period of rapid deposit growth, that had been largely shielded from view thanks to accounting rules,” according to Bloomberg. “It had mark-to-market losses in excess of $15 billion at the end of 2022 for securities held to maturity, almost equivalent to its entire equity base of $16.2 billion.”

The collapse of SVB serves as a reminder that, when investing in Treasury bonds, duration matters. For fixed income investors concerned about duration risk, BondBloxx Investment Management offers a suite of eight duration-specific U.S. Treasury ETFs to offer investors more precise duration management tools.

These duration-specific Treasury ETFs seek to offer investors a more precise, lower-cost way to get exposure to U.S. Treasury Securities. They track a series of indexes developed by Bloomberg Index Services that include duration-constrained subsets of U.S. Treasury bonds with more than $300 billion outstanding. They’re also designed to track indexes that achieve target durations using U.S. Treasury securities, instead of specific maturities or maturity ranges.

The funds that target shorter durations include the BondBloxx Bloomberg Six Month Target Duration US Treasury ETF (XHLF), the BondBloxx Bloomberg One Year Target Duration US Treasury ETF (XONE), and the BondBloxx Bloomberg Two Year Target Duration US Treasury ETF (XTWO). These three ETFs have brought in a total of nearly $224 million in investor capital year-to-date.

“All eyes are on the Fed’s next move, and investors can use duration-focused ETFs to ensure they are taking on the risk they aim for,” said Todd Rosenbluth, head of research at VettaFi.

For more news, information, and analysis, visit the Institutional Income Strategies Channel.