Investors are ramping up their exposure to short duration bond ETFs amid concerns inflationary pressures will test the so far accommodative monetary policies adopted by central banks.

According to data from Ultumus, investors piled $615m into the PIMCO US Dollar Short Maturity Source UCITS ETF (MINT) in the week to 7 May, the most across all ETFs listed in Europe.

Not far behind was the JP Morgan EUR Ultra-Short Income UCITS ETF (JEST) and the iShares € Ultrashort Bond UCITS ETF (ERNE) which saw $163m and $125m inflows in the same week.

At the same time, investors pulled assets from longer duration bond ETFs including the iShares $ Treasury Bond 20+yr UCITS ETF (IBTL) which saw $174m outflows.

Pacome Breton, director of investment risk at Nutmeg, who is speaking at ETF Stream’s ETF Ecosystem Unwrapped event on 26 May, said these trends are playing out against a backdrop of US, European and UK government bonds posting their worst starts to a year in a quarter of a century. 

Since falling as low as 0.5% last July, US 10-year Treasury yields are now topping out above 1.6%. With central banks' asset purchasing programmes keeping inflationary concerns – and rate hikes – on the agenda, the limited risk appetite is being reflected in the clear shift to shorter maturity bonds.

The level of risk and volatility of short-term maturity bonds is much lower and market participants are reducing the level of risk in fixed income portfolios,” Breton added. “Second, the curve is steepening which disproportionally impacts long term maturity bonds.

“Finally, monetary policy is set to remain accommodative for an extended period of time with short term bonds expected to remain lower for longer.” 

The rationale behind this rotation is also supported by the performance of short versus long maturities so far this year. 

Breton said while the US global bond index is down -3.6% this year, bonds with maturities over 20 years are down -11.8%, compared to the more modest -0.23% dip posted by US one-to-five-year Treasuries. 

According to Todd Rosenbluth, head of ETF and mutual fund research at CFRA, this rush to shorter maturities could be here to stay until the current inflation-rates paradigm runs its course. 

“With inflation likely to creep higher investors have been turning to, and are likely to further turn to, ultra-short bond ETFs to limit the risks of rising interest rates globally,” Rosenbluth continued. “These investment grade portfolios offer some income in addition to capital preservation for risk conscious.” 

Looking away from traditional bond exposures, the hunt for yield has also seen investors pile into higher-yielding corporates such as fallen angel and CoCo bonds, inflation hedges such as TIPS and inflation-linked bonds, and diversification away from western government debt to Chinese government bond ETFs.

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