Bond Exodus Vindicated After $1.2 Billion Flow From Treasury ETF

(Bloomberg) -- The biggest exodus since March from one of the world’s most popular bond ETFs is looking well timed.

Investors pulled nearly $1.2 billion from BlackRock Inc.’s $18 billion iShares 20+ Year Treasury Bond fund (ticker TLT) last week in the aftermath of the U.S. election, according to data compiled by Bloomberg. It was the fund’s biggest weekly outflow since March.

Fast forward to Monday, and those withdrawals look downright prescient. Long-dated Treasuries sold off mightily following news that a large-scale study of the Covid-19 vaccine being developed by Pfizer Inc. and BioNTech SE showed it prevented more than 90% of infections. While the outflows were likely motivated by profit-taking -- TLT posted its best advance since August last week as investors cheered the outlook for a divided federal government -- the timing of the vaccine news is a blessing for bond bears.

“The outflows in TLT were timely as we saw further buying of risk assets such as high yield following the election and Senate news,” said Mohit Bajaj, director of ETFs for WallachBeth Capital. “Today, long-duration Treasuries will be heavily sold with the vaccine announcement.”

TLT dropped 2.3% as trading kicked off Monday, its biggest decline since June. The ETF has returned over 16% in 2020, buoyed by haven demand as the coronavirus pandemic spread.

Bets against long-dated Treasuries have been climbing as of late. Short interest as a percentage of shares outstanding on TLT stands at 8.8%, the highest level since late September, according to data from IHS Markit Ltd.

That bearish sentiment is poised to pick up steam, with expectations of a further bond selloff building.

“If you look at the growth picture for the U.S. with a vaccine and a reopening, I think interest rates being higher a year from now is probably not a very controversial call,” said Andrew Mies, chief investment officer of 6 Meridian.

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