Industry Updates

Outflows for short-duration bond ETFs as bullish investors bet on V-shaped recovery

Tom Eckett

a group of poker chips

European investors rotated out of short-duration bond ETFs into higher risk assets last week, a sign bulls are going all-in on a V-shaped recovery.

According to data from Ultumus, the iShares $ Treasury Bond 0-1yr UCITS ETF (IB01) saw outflows of $212m in the week to 5 June while $143m was pulled from the German-listed iShares eb.rexx® Money Market UCITS ETF (DE) (EXVM).

Meanwhile, a combined $253m was withdrawn from iShares € Govt Bond 1-3yr UCITS ETF EUR (IBGS), the iShares € Govt Bond 0-1yr UCITS ETF EUR (IEGE) and the iShares € Ultrashort Bond UCITS ETF (ERNE).

Barring cash, ultrashort duration is seen as the ultimate safe haven for investors when looking to protect themselves from volatile periods in the market.

Furthermore, the Invesco Physical Gold ETC (SGLD) and the iShares Physical Gold ETC (IGLN) saw outflows of $243m and $139m, respectively.

Somewhat interestingly, investors piled into gold ETCs the previous week with SGLN seeing the most inflows across all European-listed ETPs meaning this is the first week bulls are confident about the return to some form of normality following the coronavirus turmoil.

Markets have made a dramatic recovery since the Federal Reserve announced its “unlimited” quantitative easing programme to support the US economy.

Since 23 March when markets bottomed out, the S&P 500 has returned 42.7%, as at 10 June, while the Dow Jones is up 45%.

Meanwhile, the European Central Bank (ECB) has also supported the eurozone with an additional €600bn of stimulus taking its pandemic emergency purchase programme (PEPP) to €1.35trn.

Monica Defend, global head of research at Amundi, said: “ECB: Job done.

“We have a positive reading of the PEPP size increase and time extension. It tempers market anxiety of tapering a V shaped recovery.”

However, not all are entirely confident of a V-shaped recovery. Sushil Wadhwani, CIO at QMA Wadhwani and former Bank of England Monetary Policy Committee (MPC) member, said a second wave of coronavirus infections would put a V-shaped recovery out of reach.

“If we do not get a V-shaped recovery, the Federal Reserve will proactively look at a number of tools,” Wadhwani continued. “They have been quite clear that negative rates would not be at the top of the list. Instead, the focus would be on partnering with the government and a lot more buying of risky assets.”

“Clearly there is an intimate relationship between the medical front and economic forecasting, which is why it is also very uncertain.

“This is not a period to have bold medium or long term views. Instead, it is a period where it is very important to be agile, to respond to the incoming news, and to be willing to trade in either direction.”

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