JPMorgan Chase & Co.’s Jamie Dimon may think that benchmark Treasury yields could hit 5 percent or more. But try telling that to ETF buyers.
Investors are piling into exchange-traded funds tracking areas that traditionally do well when interest rates stay low, like real estate investment trusts, utilities stocks and long-dated Treasury bonds. It’s a risky bet that yields will stay low, according to Chris Zaccarelli, the chief investment officer at Independence Advisor Alliance. The logic is that as warnings of trade wars increase, some investors are speculating the disputes could cause the Federal Reserve to scale back its plans for future rate hikes.
“It’s very much focused on what you believe, if you really believe this trade war is going to happen, there’s going to be a problem,” Zaccarelli said, describing this version of a flight to quality. “Potentially they think the trade war is going to be what pushes the economy into a recession. There’s this fear that the U.S. expansion is going to stop.”
Yields on benchmark 10-year Treasury notes briefly rose above 3 percent Friday and equity markets acted in line, with financials outperforming. Conversely, real estate and utilities were the biggest laggards.
In aggregate, U.S.-listed ETFs tracking real estate stocks have taken in over $258 million so far this month. The inflows add to three consecutive months of asset gathering, a stark reversal from the previous five straight months of outflows.
Treasuries Yield-Bound
Demand this week has been notable. The $2.6 billion SPDR Dow Jones REIT ETF, known by its ticker RWR, took in $82 million on Tuesday, the most in one day since January 2016. The $3 billion Real Estate Select Sector SPDR Fund, or XLRE, saw $122.8 million of inflows on Wednesday, the most since February.
Also at play is a 10-year Treasury yield that’s been range-bound the majority of 2018, lulling investors into a sense of calm. REIT prices bottomed between February and May, around when the 10-year yield was settling in the range of 2.8 percent to 2.9 percent, according to Bloomberg Intelligence analyst Jeffrey Langbaum.
“REIT investors got confident that this was the level, and that REITs could work with rates at this level,” he said.
Duration Risk