Short duration bond ETFs were in vogue last week following the Federal Reserve’s decision in June to bring interest rate hikes forward to 2023 and better-than-expected non-farm payroll statistics signalling further upward pressure on inflation.
According to data from Ultumus, the iShares $ Treasury Bond 3-7yr UCITS ETF (CSBGU7) saw $317m in the week ended 2 July while the PIMCO US Dollar Short Maturity UCITS ETF (MINT) booked $219m in new assets.
Meanwhile, the iShares $ Treasury Bond 20+yr UCITS ETF (IBTL) booked $92m outflows over the same period which coincided with H1 performance data showing DTLE – the euro-hedged version of IBTL – was one of the worst-performing ETFs in the first six months of the year, falling -12.9%.
While a shortened timeline on the reintroduction of interest rates brought the yields and duration discussions back to the fore in June, US non-farm payrolls hit 850,000 during the month, well ahead of economists’ 700,000 forecast.
Overall, last week’s jobs update delivered mixed messages. Although unemployment in the US also ticked upwards in June, year-on-year wage growth shot up at its fastest pace since the Global Financial Crisis, while working hours fell.
However, while far short of the Fed’s full employment target, policymaker rhetoric last week began hinting at possible tapering, showing inflation and jobs are currently tussling for the top spot on the central bank’s agenda.
Althea Spinozzi, fixed income strategist at Saxo Bank, said: “During his testimony for Congress [in June], Powell admitted that the central bank found ‘inflation to be larger and more persistent than expected’, suggesting that ‘transitory’ may be longer than expected."
ETFs most sensitive to inflation
In the meantime, at least, the market expects the market to remain accommodative, Spinozzi added.
Spinozzi continued: “This week's minutes will be critical as they may give an idea of whether FOMC members are starting to be less confident about inflation's transitory nature and when the Fed could begin tapering its asset purchases.
“Regardless, US Treasury yields will most likely continue to trade rangebound until the Federal Reserve begins to engage more actively with tapering talks.”
Excess liquidity, the resumption of a debt ceiling limit and the drawdown of the Treasury General Account (TGA) will likely all continue to dampen US Treasury Yields, with Spinozzi saying investors can expect negative Treasury Bill rates in the short-term and a bear flattening of the US yield curve in the mid-term.
“It does not mean that long term yields will continue to fall,” Spinozzi added. “They might fall and break below 1.40% in the short-term, finding support next at 1.20%. Yet, as inflationary pressures become less transitory, we might see the yield curve shifting higher while bear-flattening.”