Bid for Bonds Is Back, If You Look Beneath the Hood of ETF Flows

(Bloomberg) -- As stocks plummeted on Monday, the bond market largely shrugged -- or at least that’s how it looked on the surface as the Bloomberg Barclays U.S. Aggregate Bond Index barely budged.

But a glance at exchange-traded fund flows shows otherwise, with investors pouring money into U.S. debt funds. More than $600 million flowed into Treasuries, while another $97 million headed for floating-rate corporate debt, data compiled by Bloomberg show. Meanwhile, the equity mega-funds -- those focused on the S&P 500 Index and Russell 2000 Index -- unsurprisingly led outflows.

The iShares 1-3 Year Treasury Bond ETF, which trades under the ticker SHY, had its biggest one-day inflow since January 2017, adding $259 million. Its cousin, IEF -- the iShares 7-10 Year Treasury Bond ETF -- had its second consecutive day of inflows for the first time in over a month, while TLT -- iShares 20+ Year Treasury Bond ETF -- took in the most since Feb. 5, when volatility soared.

“This is more of a tactical move to safety,” said Mohit Bajaj, director of exchange-traded funds at WallachBeth Capital. “We aren’t out of the woods yet, especially with technology moving the way it has been. So I think we could definitely see more flow in Treasury funds as a cash parking vehicle until things settle down.”

But these funds have a strange bedfellow in the junk bond fund HYG. The iShares iBoxx $ High Yield Corporate Bond ETF took in $330 million, despite closing near its lowest level since 2016. A measure of credit risk for U.S. high-yield bonds meanwhile reached the highest levels since December 2016.

Don’t be fooled that investors are changing their minds about junk debt, says Josh Lukeman, head of ETF market making for the Americas at Credit Suisse AG. The inflows could represent some spying a bargain while others may be looking to cover their bets against the asset class, and there could even be banks acquiring HYG to lend it out to a third party to short, said Lukeman.

--With assistance from Tom Lagerman (Bloomberg Global Data)

To contact the reporters on this story: Rachel Evans in New York at revans43@bloomberg.net, Carolina Wilson in New York City at cwilson166@bloomberg.net.

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Eric J. Weiner, Joanna Ossinger

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