ETF investors wary of rising bond yields are turning away from risk assets as fears over sticky inflation and rising interest rates persist.
US 10-year Treasury yields topped 4% on Wednesday, its highest level since 2007, rising almost 40 basis points in February in their biggest monthly increase since last September.
It comes as tight labour markets and hotter-than-expected inflation in the US in January sent yields rising, with investors now fearing central banks will keep interest rates higher for longer.
The latest Consumer Price Index (CPI) reading in the US hit 6.4% year-on-year in January, above market expectations of 6.2% while US retail sales spiked 3%.
As a result, ETF investors flocked from riskier areas in the bond market with the iShares Core € Corp Bond UCITS ETF (IEAC) posting outflows of $1.2bn over February while the iShares € High Yield Corp Bond UCITS ETF (IHYG) recorded outflows of $326m, according to data from ETFLogic.
Investors were also exiting long-duration ETFs, with the iShares Germany Govt Bond UCITS ETF (IS0L), which has a weighted average maturity of 8.2 years, recording $574m outflows.
Meanwhile, the Xtrackers Eurozone Government Bond 5-7 UCITS ETF (X57E) and the Invesco US Treasury Bond 7-10 Year UCITS ETF (TRDE) saw outflows of $302m and $267m, respectively.
Conversely, the iShares € Corp Bond 1-5yr UCITS ETF (IE15) recorded inflows of $389m while the Lyxor US Curve Steepening 2-10 UCITS ETF (STPU) saw $335m inflows.
There are fears that the bond market rout could soon hit equities, with central banks keeping rates higher for longer raising the risk of a more severe recession.
Marko Kolanovic, chief market strategist at JP Morgan, said: “History implies that for the current level of real rates the S&P 500 multiple is circa 2.5x overvalued.
“Higher-for-longer rates create negative externalities, including demand destruction, lower margins, higher interest cost for levered assets and asset write-downs and credit losses. Furthermore, the tailwind in global central bank liquidity may be turning into a headwind.”
The S&P 500 gave back 40% of its January rally last month, falling 2.4% on the US inflation figures.