Industry Updates

Investors pull $1bn from PIMCO’s ultrashort US Treasury ETF

US inflation cooled in October

Tom Eckett

US Treasury dollar

Investors have yanked over $1bn from PIMCO’s ultrashort US Treasury ETF this month, a sign of increasing demand for longer-duration.

According to data from ETFbook, the PIMCO US Dollar Short Maturity UCITS ETF (MINT) has seen $1bn outflows this month, as at 17 November.

MINT is an actively-managed ETF that is benchmarked against the ICE BofAML US 3-Month Treasury Bill index and currently has an effective maturity of 0.18 years with an estimated yield of 6.4%.

Further highlighting the shift away from the short end of the US Treasury yield curve, the iShares $ Treasury Bond 1-3yr UCITS ETF (IBTS) saw $260m net redemptions over the same period.

When to add duration risk to portfolios has been one of the biggest challenges for fund selectors this year amid the unexpected resilience of the US economy.

“The narrative today is resilience. Everyone believes the US economy is strong but there are cracks appearing, particularly when looking at the consumer. Delinquencies are picking up in credit cards and auto loans are at a higher level than in 2008,” Nathan Sweeney, CIO of multi-asset at Marlborough, said at ETF Stream’s ETF Buyer: London event.

“Things can move quickly and it is important to lock in duration at higher interest rates. Therefore, we added duration when the Federal Reserve stopped raising interest rates in June.”

There are signs the Fed is starting to get inflation under control after the Consumer Price Index fell further than expected to 3.2% over the 12 months to October, driving 10-year US Treasury yields to their biggest one-day fall since the banking crisis in May.

As a result, markets are forecasting just a 12.4% chance the US central bank will increase interest rates at January 2024’s Federal Open Market Committee (FOMC) meeting and a 51.7% chance of a rate cut in May.

This is a significant shift in sentiment, given markets were pricing just a 31.3% probability of a rate reduction during May 2024’s meeting just a month ago.

The forecasts of no further rate hikes is a boon for long-duration US Treasury ETFs which have fallen dramatically over the past 18 months. However, the yield curve remains inverted with 10-year US Treasuries offering 4.48% versus 4.95% for two-year notes, as at 24 November.

“We upgraded long-term US Treasuries to neutral on a tactical, six-to-12-month horizon last month because we now see even odds of yields swinging in either direction in this volatile environment,” Wei Li, global chief investment strategist at the BlackRock Investment Institute, said.

“Volatility is a constant in the new regime, with markets quick to extrapolate single data releases. We believe the Fed is ending its hiking cycle.”

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