Short Bets in $14 Billion Treasury ETF Say Yield Calm Will Break

As Treasury yields stall near their prepandemic highs, investors are wagering that the tranquility will be short-lived.

Short interest in the $14 billion iShares 20+ Year Treasury Bond exchange-traded fund (ticker TLT) has climbed to about one-fifth of the shares outstanding, the highest since early 2017, according to data from IHS Markit Ltd. Bearish bets have risen from 7% at the start of 2021 amid the fund’s 13% year-to-date drop.

While the bond selloff that’s hammered TLT appears to have leveled off with 30-year yields hovering near 2.4% for the better part of a month, the surge in short bets suggests investors don’t expect the calm to last long. Though yields have already moved “significantly” after the market aggressively repriced a brighter growth outlook, turbulence is likely to return as economic data is released over the next few months, according to Principal Global Investors.

“This period of calm is likely short-lived,” said Seema Shah, the firm’s chief strategist. “We expect investors to grapple with the higher inflation and growth environment repeatedly through 2021. Each piece of strong economic and inflation data will unnerve investors again, driving volatility higher.”

Short Bets in $14 Billion Treasury ETF Say Yield Calm Will Break

Investors have pulled almost $2.6 billion from TLT so far in 2021, putting the fund on track for the worst year of outflows since its inception in 2002. Upgraded growth forecasts and climbing inflation expectations have dragged down long-duration funds such as TLT and the $40 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (ticker LQD), which posted its biggest one-day outflow on record last week.

The ICE BofA MOVE Index, a gauge of U.S. bond volatility, has eased to roughly 62 from a peak of 76 reached in late February, the highest level in 11 months. While the bond market is in a “holding pattern” after positioning for much more robust economic growth, the next catalyst will come from whether or not the data ultimately deliver, according to Richard Bernstein Advisors LLC.

“Treasuries have largely priced the current Covid stimulus, the promise for infrastructure, and an economic recovery,” said Michael Contopoulos, the firm’s director of fixed income and portfolio manager. “The next leg will be determined by hard data -- actual increases in inflation, more than just promise for better days. Over the course of the year and in 2022, we should expect more volatility and trending higher rates.”

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