US steepeners ETF sees outflows amid fading Fed cuts narrative

US inflation continues to defy forecasts

Tom Eckett

Bear market Federal Reserve

Investors have pulled almost $500m from Amundi’s US yield curve steepening ETF amid bets the Federal Reserve will not cut rates as quickly as market expectations.

According to data from ETFbook, the Amundi US Curve Steepening 2-10Y UCITS ETF (STPU) has seen $486m net new redemptions so far this month, as at 21 March, while investors have pulled a further $220m from the Amundi US Curve Steepening 2-10Y UCITS ETF Monthly Hedged To GBP (STPH).

Outflows from STPU come after US inflation came in above forecasts in both January and February, a key driver behind the Fed’s decision to keep interest rates at a 23-year high of 5.25-5.5%.

Markets are pricing in a 36.8% chance the US central bank will lower rates four or more times in 2024 versus as many as seven cuts at the start of the year following the Fed’s dovish signals last December.

The lack of movement in rates so far this year has kept the US Treasury yield curve inverted, with the front end of curve still trading above 5%, as at 26 March.

Overall, inflows into fixed income ETFs have slowed dramatically as investors adjust to the idea of less rate cuts.

According to Invesco, fixed income ETFs saw just $2.8bn inflows in February versus $8bn in January as strong economic data continues to put upward pressure on bond yields.

“For 2024, markets are betting on a cooling in inflation, a soft economic landing (or even no landing at all) and a pivot to rate cuts from central banks after two years of quick-fire increases,” Russ Mould, investment director at AJ Bell, said.

“But investors might like to consider the possible implications of poor forecasts this year. This recalibration of expectations is not guaranteed to derail the equity bull market, even if 2024 could be the third year in a row when interest rate expectations have proven way off beam.

“Stock markets seem unconcerned – perhaps even welcoming the prospect of higher nominal GDP growth – but bond markets are paying attention.”

This negatively impacts the outlook for US yield curve steepener ETFs which outperform when short-duration yields are falling.

Specifically, STPU tracks the Solactive USD Daily (x7) Steepener 2-10 index which offers exposure to a leveraged long position in two-year US Treasuries and a leveraged short position in 10-year US Treasury ultra-bond futures.

According to Amundi, the ETF amplifies the performance of both exposures by seven, effectively turning its 81.7% allocation to 1-3y bonds and 18.3% allocation to 7-10y securities to 396% exposure on the short end and -88.7% on the long end.

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