It’s been just four weeks since the first U.S. rate cut in more than a decade, but a mass migration is already underway in financial markets.

The Federal Reserve’s pivot to easier monetary policy has spurred the busiest August for the $4 trillion U.S. market for exchange-traded funds since the government-debt downgrade of August 2011, as everyone from mega-traders to mom-and-pop investors adjusts to a new paradigm.

No wonder, for there’s a lot to take in. Beyond the U.S. central bank’s bold step, there’s an escalating trade war with China, a record-beating stockpile of negative-yielding bonds, and persistent signals of recession lurking within the yield curve. Together, they’re fueling a multi-trillion-dollar rethink of strategies heading into year-end.

“Investors had been anticipating a rate cut, and now that it’s happened, they’re trying to determine if the risk is even greater than they perhaps previously perceived,” said Todd Rosenbluth, director of ETF research at CFRA Research. “Given the strong interest in safe-haven assets and strong trading volume in August, we could see an acceleration.”

Debt Rotation

Almost $2.2 trillion of ETF shares have changed hands this month, typically a sleepy period for markets, data compiled by Bloomberg show.

Nowhere was this more evident than within the bond market, where ETF trading topped its record for the month. Floating-rate notes, which tend to do well when rates rise, are out of fashion, and inflation-protected securities -- which hedge against price gains, a byproduct of lower rates -- are back in vogue.

ETFs focused on floating-rate notes have hemorrhaged a record $1.4 billion since the Fed reduced rates, and outflows could deepen if traders’ bets for further cuts by year-end come to fruition.

“The forecast for the payout on those is not good,” David Donabedian, chief investment officer of CIBC Private Wealth Management, said of these notes. “Certainly a part of that is the realization that rates are going down, not up.”

The Fed meets again in mid-September and futures pricing shows traders see rates declining 50 basis points by Dec. 31, with a 36% chance of an additional quarter-point cut.

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