Investors Seek Intermediate Bond ETFs as Fears of Rising Rates Subside

(Bloomberg) -- As investors lower their expectations for further rate hikes, exchange-traded fund buyers are placing big bets on intermediate bond funds.

The $12 billion iShares 7-10 Year Treasury Bond ETF, ticker IEF, took in almost $1.7 billion of assets on Wednesday, the most in a single day since 2014, and more than $1.9 billion has poured in this week. Similarly, the $1.4 billion SPDR Bloomberg Barclays Intermediate Term Treasury ETF, known as ITE, had a record inflow of $719 million on Wednesday.

The moves are part of a broader market bet that interest rates won’t be affected as much as most people feared, according to Dave Campbell, a principal at the San Francisco-based wealth management firm BOS.

“If you’re looking at those money movements it’s, ‘How do I earn the most on my bond investments?’” Campbell said. “We’ll take a bit more duration risk, but the bet is we won’t see a rise in interest rates because of fears of economic slowdown.”

Rate expectations for investors have shifted meaningfully in recent weeks, with the market pricing in a greater probability that rates will fall rather than rise in 2019, according to Jon Rather, iShares Fixed Income Strategist at BlackRock. This makes the intermediate-term bond ETFs more attractive than funds holding short-duration debt.

This explains why short-duration funds are dealing with outflows. Investors on Thursday yanked more than $416 million from the $8.3 billion SPDR Bloomberg Barclays 1-3 Month T-Bill ETF, or BIL, the most since 2015. Similarly, the $5.7 billion iShares Short Maturity Bond ETF, or NEAR, saw $164 million leave the fund on Wednesday, the most since June.

“Some investors are rotating out of short-term bond funds and into intermediate core funds for more duration exposure to add portfolio resiliency and protect against equity market volatility,” Rather said.

In addition, since funds with short-term exposure like BIL are considered cash-parking equivalents, getting into longer-dated Treasuries makes sense to capture a better a return, said Mohit Bajaj, director of exchange-traded funds at WallachBeth Capital.

“The yield on short-term ETFs is minimal and I think fund managers are looking for additional alpha,” Bajaj said. “Especially now that it’s the beginning of the year, they are resetting their portfolios. They don’t get paid for just sitting on cash.”

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