Industry Updates

Investors turn to short-duration bond ETFs as Fed signals faster rate increases

Short-term bonds in vogue as investors ditch longer-dated counterparts

Theo Andrew

a few paper money on a table

Investors flocked to short-dated bond ETFs last week in a bid to shelter from a turbulent market as the Federal Reserve signalled a faster pace of interest rate increases in the coming months.

The Fed indicated it could raise rates by 0.50% as early as next month and start reducing its $9trn asset portfolio as it looks to curb mounting inflation.

As a result, investors ditched longer-dated bonds for their short-term counterparts.

Highlighting this, the iShares $ Treasury Bond 1-3yr UCITS ETF (IBTS) recorded inflows of $287m in the week ending 19 April while the iShares € Govt Bond 1-3yr UCITS ETF (IBGS) posted inflows of $256m over the same period, according to data from Ultumus.

The Vanguard USD Corporate 1-3 Year Bond UCITS ETF (VUSC) recorded $112m inflows while the iShares $ Corp Bond 0-3yr ESG UCITS ETF (SUSU) saw an asset influx of $76m.

Elsewhere, the $338m Invesco US Treasury Bond 1-3 Year UCITS ETF (TRE3) booked inflows of $59m while the iShares $ Short Duration Corp Bond UCITS ETF (SDIG) posted inflows of $41m.

Meanwhile, investors have continued to take money from longer maturity bonds as volatility in the market persists. The iShares Core € Corp Bond UCITS ETF (IEAC) posted outflows of $432m last week while the US dollar-denominated version, the iShares $ Corp Bond UCITS ETF (LQDE), recorded $78m outflows.

Elsewhere, the iShares € High Yield Corp Bond UCITS ETF (IHYG) saw an asset exodus of $316m, compounded by further outflows from its ESG counterpart, the iShares € High Yield Corp Bond ESG UCITS ETF (EHYA), recording $64m outflows.

Despite the rush to short-duration, Athanasios Psarofagis, ETF analyst at Bloomberg, said there are signs investors are starting to come back to longer-dated bonds.

“The flight to short duration is certainly a rate scare play, but also a parking space for when markets get volatile. The big spots taking money on the fixed income side is anything short duration or floating rate.

“We are seeing some flows coming back to the long-end of bonds, but that seems like a short-term buy the TIP play and those who think rates may cool off in the short term.”

There are signs investor confidence in growth and inflation has risen over the past couple of weeks after the yield curve resteepened after inverting in early April.

The two-10 year US Treasury yield spread is currently at 0.32% having inverted to -0.05% earlier this month. The news comes as the market anticipates a speech by Fed chair Jay Powell on 21 April which may offer more signs about how it plans to curb consumer price inflation which hit 8.5% in March.

Bond allocations fell to their lowest levels since the Global Financial Crisis in 2008 with liquidity drying up and the low-yield environment in a whirlwind year so far in 2022, according to research from JP Morgan.

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