Investors of exchange-traded funds that buy U.S. government debt are signaling that economic-growth optimism is taking root.
After pouring into the ETFs to start the year, investors pulled $10.3 billion in March, the biggest exodus since December 2010, data compiled by Bloomberg show. The $7.86 billion iShares 1-3 Year Treasury Bond ETF alone lost a third of its assets from withdrawals, the most of any fixed-income fund this month.
The retreat shows how quickly ETF investors recalibrated expectations as Fed Chair Janet Yellen said March 19 that a strengthening U.S. economy may prompt the central bank to lift its benchmark rate six months after it stops buying bonds. While Treasuries have confounded forecasters by outperforming this year, ETF investors are shifting money into riskier assets such as junk loans and small-cap stocks to capture greater returns.
“There is less and less value in Treasuries,” Thomas Higgins, global macro strategist at Standish Mellon Asset Management Co., which oversees $167 billion of fixed-income assets, said in a telephone interview from Boston. “When the market thinks the Fed is going to raise rates, they don’t tend to stick around in short-dated bonds.”
Higgins said his firm favors speculative-grade corporate bonds and has been selling Treasuries.
Biggest Returns
The redemptions in March have all but erased the net inflows U.S. government bond ETFs garnered in the first two months of the year, when an economic slowdown in China, crises from Thailand to Ukraine and questions over the strength of the U.S. economy caused investors to seek out the safest assets.
Treasuries posted their biggest returns since 2010 in January and February, with yields on the benchmark 10-year note falling almost a half-percentage point from a 29-month high at the start of the year to a low of 2.57 percent last month.
This month, U.S. government bonds have been the target of the most-acute selling among ETF investors, pushing up yields on 10-year Treasuries to 2.72 percent last week. That trimmed the return on the notes to 3.5 percent for the year, which would still be the first quarterly gain since 2012.
The yield rose two basis points, or 0.02 percentage point, to 2.75 percent as of 8:13 a.m. in New York.