Industry Updates

Investors shun long-duration ETFs as Fed rate cut outlook worsens

IDTL nears $1bn in outflows

Theo Andrew

US Treasury dollar

Investors have shunned long-duration ETFs this month as they become increasingly uncertain over the Federal Reserve rate-cutting cycle.

The $7.2bn iShares $ Treasury Bond 20+yr UCITS ETF (IDTL) recorded $914m outflows in February according to data from ETFbook, highlighting investor uncertainty.

Conversely, the $10.8bn iShares $ Treasury Bond 1-3yr UCITS ETF (IBTS) posted $295m inflows as investors were once again eyeing up the short end of the yield curve.

It comes as hotter-than-expected economic prints and stronger-than-anticipated inflation in the US has left investors anticipating the Federal Reserve will keep interest rates higher-for-longer.

The Consumer Price Index (CPI) fell to 3.1%, in January, higher than 2.9% expectations, and the Producer Price Index (PPI) also failed to meet forecasts.

According to the CME’s FedWatch Tool, markets are pricing in an 88% chance the US central bank will cut rates by just 1% by the end of the year. At the start of the year, markets were pricing in as many as seven rate cuts in 2024.

Bond yields have risen over the past two weeks following recent US inflation data and Fed rhetoric.

Marko Kolanovic, chief market strategist at JP Morgan, said the uptick in yields could be seen as a good entry point for duration.

“The extent of the re-pricing of Fed expectations, and a historically high share of neutrals in our treasury client survey, means there is scope for yields to decline over the medium term as the uncertainty introduced by recent inflation and labour market data fades,” he said.

According to the latest JP Morgan client survey, 91% said they expected to increase their bond exposure over the near term.

Bond ETFs in Europe saw a record $63bn inflows in 2023, ahead of the previous record set in 2019, according to data from Invesco.

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