Someone's Buying the Yield Curve in ETFs Ahead of Fed Rate Decision

(Bloomberg) -- With markets swinging wildly as traders try to assess the pace of interest rate hikes by the Federal Reserve, it seems as if one large investor is stocking up on exchange-traded funds tracking Treasuries up and down the yield curve.

The Vanguard Short-Term Bond ETF, ticker BSV, had inflows of more than $493 million in one day this week, the most since June. It’s taken in close to $1.2 billion since Dec. 12, putting it on track for the best month of asset gathering since January.

The bulk of Monday’s activity looks to have been driven by one trader who bought about 3.8 million shares worth $301 million at 12:12 p.m. in New York. Two more block buys printed Tuesday, one worth $392 million and the other worth $141 million.

In addition, it appears the same trader also bought blocks of the Vanguard Intermediate-Term Bond ETF, or BIV, and the Vanguard Long-Term Bond ETF, or BLV. BIV saw 4.9 million shares bought for $396 million at 12:56 p.m. in New York on Tuesday, and BLV saw 4.6 million shares bought for $401.5 million four minutes later.

“This is definitely all one investor getting into different durations of the curve,” said Mohit Bajaj, director of exchange-traded funds at WallachBeth Capital.

A highly-anticipated decision on interest rates is coming from the Federal Reserve on Wednesday. The U.S. central bank is expected to raise the benchmark rate by a quarter point to 2.25 percent to 2.5 percent, the highest in a decade.

Yield Diversification

Although the hot-spot for fixed-income flows this year has largely been concentrated in funds tracking ultra-short and short-term Treasuries, investors are starting to diversify along the yield curve, Bajaj said.

“The Vanguard bond funds have performed well this month, all three in the green month-to-date while the broader S&P is down,” he said. “It makes sense to see some reallocation to various durations of the curve going into year-end.”

Others, like OppenheimerFunds, favor longer-dated bonds, according to Talley Leger, an equity strategist at the firm. Technical elements, a stronger dollar mixed with cooling inflation, and an awakening to slower future growth should help temper longer-dated bond yields, he said.

“The view is generally that despite these cyclical upward pressures that we saw in growth and inflation,” Leger said. “Those shorter term trends wouldn’t last and that interest rates and bond yields would generally stay historically low.”

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