By Suzanne McGee and Bansari Mayur Kamdar
Investors in exchange-traded funds (ETFs) flocked to the very short end of the U.S. Treasury yield curve on Thursday, as prices for most U.S. government bonds sank after the Federal Reserve projected a longer-than-expected period of high interest rates.
The iShares 0-3 Month Treasury Bond ETF and SPDR Bloomberg 1-3 Month T-Bill ETF were among the few fixed income ETFs that gained on Thursday, amid a broader bond selloff prompted by the Fed's meeting a day before.
Benchmark U.S. 10-year note yields, which move inversely to prices, hit 4.490%, the highest since November 2007. Interest rate sensitive two-year yields reached 5.202%, the highest since July 2006. Yields on many shorter-dated maturities, by contrast, were little changed.
“Anything long duration is feeling pain,” said Todd Sohn, ETF and technical strategist at Strategas Securities in New York.
The Fed’s hawkish outlook “reinforces investors’ preference for ultra-short, cash-like vehicles,” Sohn added. “Interest rate risk is not an issue for those ultra-short vehicles.”
Investors on Wednesday pumped an estimated $25.3 million into the iShares Treasury Floating Rate Bond ETF, data from Lipper showed. That compared to inflows of $66.4 million for all of August.
Investors view floating rate ETFs as hedges against flat-to-rising rates, since they are based on securities that reset coupon rates every 30 or 60 days.
The shift to shorter maturities kicked in last month, Lipper data showed. The iShares 20+ Treasury Bond ETF, a popular vehicle on the direction of longer-term Treasuries, notched a net $225.9 million of outflows after garnering inflows for most of the year.
By contrast, former laggards within the ultra-short segment, like the SPDR Bloomberg 1-3 Month T-Bill ETF and iShares 0-3 Month Treasury Bond ETF, each pulled in an estimated $900 million.
(Reporting by Suzanne McGee and Bansari Mayur Kamdar; Editing by Ira Iosebashvili and Barbara Lewis)
