Traders Sidestep ‘Rate Freight Train’ With Short-Dated Bond ETFs

The surge in Treasury yields has cooled down, but exchange-traded funds tracking the bond market are showing tensions might be building under the surface.

Investors put $2 billion into the Vanguard Short-Term Treasury ETF (ticker VGSH) and about $660 million into the Schwab Short-Term U.S. Treasury ETF (ticker SCHO) last week -- a record for both funds, according to data compiled by Bloomberg. Meanwhile, traders rushed out of the iShares 20+ Year Treasury Bond ETF (ticker TLT), which tracks longer-dated debt and bled nearly $1 billion in the span.

This year’s Treasury selloff slammed funds that focus on longer duration -- a measure of sensitivity to interest-rate changes -- spurring billions of dollars in withdrawals. Though bond investors have gotten a reprieve over the last month as yields have drifted lower, there’s still caution around stepping into long-dated debt as the U.S. economic picture continues to brighten.

“The spike in rates earlier this year clearly spooked some investors, who are now reevaluating the risk-reward of owning duration,” said Nate Geraci, president of advisory firm The ETF Store. “Investors are becoming much more reluctant to stand in front of the rate freight train. There’s no question the bias is towards owning shorter duration.”

Traders Sidestep ‘Rate Freight Train’ With Short-Dated Bond ETFs

Persistent bearish wagers against TLT tell a similar story. Short interest in the ETF is nearly 19% of shares outstanding, close to the highest level since 2017, data from IHS Markit Ltd. show. TLT has sank over 11% so far this year, after surging 16% in 2020. Meanwhile, VGSH and SCHO are both little changed year-to-date.

The rush into short-duration Treasury ETFs coincides with a rotation out of popular stock funds, notes Bloomberg Intelligence’s Eric Balchunas. Investors pulled $8.7 billion from the $357 billion SPDR S&P 500 ETF Trust (ticker SPY) last week -- the most since September -- while the $164 billion Invesco QQQ Trust Series 1 (ticker QQQ) posted weekly outflows of $2.6 billion.

“This smells like some nerves showing and maybe some profit taking by the trading crowd given the outflows we are seeing from some of their favorite equity ETFs, which have started to move sideways after a big surge in early April,” BI strategist Balchunas said.

©2021 Bloomberg L.P.

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