While short-duration bond strategies were all the rage last year, exchange-traded fund investors are giving love to something a little longer lasting.
Treasury ETFs tracking intermediate and longer-term bonds are now in vogue after the Federal Reserve’s dovish turn last week. It’s a reversal from the second half of 2018, which saw a rush toward ultra-short and short-term Treasuries amid expectations that the Fed would continue with steady increases to borrowing costs.
More than $1.1 billion has flowed out of short-term bond funds already in February, putting it on track to be the first month of outflows since 2016. Meanwhile, the new year has lured buyers into strategies that favor intermediate-term bonds, as evidenced by the nearly $6.7 billion that the category has attracted this year.
Most recently, the $5.6 billion Vanguard Short-Term Treasury ETF, ticker VGSH, lost $240 million of funds one day this week, its single worst day. The fund tracks Treasury bonds maturing in one to three years. Meanwhile, the $19.4 billion iShares 1-3 Year Treasury Bond ETF -- or SHY -- saw more than $660 million in outflows last week, the most since June.
While much of the cash that was once in shorter-duration bond ETFs has shifted to longer-term bonds, some of it may be heading to equities as investors try to catch the rallying stock market.
The ultra-short and short-term bonds may have also been used as safe-haven trading vehicles as investors moved out of equities and into products with less risk when stocks took a bearish turn last quarter, according to Paul Brigandi, managing director at Direxion, an issuer that specializes in leveraged ETFs.
“They could go back into equities which are rebounding here,” Brigandi said. “Or they could go into a higher yielding product and then go out on the curve.”
This article was provided by Bloomberg News.