Bond ETF flows signal investors calling bluff on Fed Hawkishness

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During periods of rising interest rates, investors have generally opted for the short end of the bond duration curve to reduce interest rate risk.

However, examining the flow of funds into long and short-term bonds over the past four weeks reveals an unusual story, suggesting that investors believe the Fed will act less aggressively than it has signaled several times. occasions.

After raising the benchmark federal funds rate by a quarter of a percentage point, in a speech to the National Association of Business Economists on March 21, Fed Chairman Jerome Powell said the Fed must act “quickly” to reach the neutral rate or possibly move from the neutral rate to a more restrictive level. Powell is not alone; other members of the Federal Open Market Committee have also spoken harshly in recent weeks.

Although most Fed officials plan to raise the rate to at least pre-pandemic levels, in line with interest rates rising at every scheduled meeting this year, over the past four weeks bond ETFs the longer ones receive much more flow than their short-term counterparts.

“It’s counterintuitive because the Federal Reserve raised interest rates for the first time in years and confirmed its intention to raise rates multiple times in the rest of the year,” Todd said. Rosenbluth, head of research at ETF Trends and ETF Database. “However, some investors seem to believe the Fed will be less aggressive due to geopolitical risks associated with Russia’s invasion of Ukraine.”

Short-term bond ETFs, which have $119 billion in combined assets under management, saw combined net outflows of $255.23 million over a four-week period, according to ETF Database.

On the other hand, long-term bond ETFs, which hold $106 billion in combined assets, saw $4.97 billion in net inflows over the same period, according to ETF Database.

In the short-term bond category, the iShares 1-3 Year Treasury Bond ETF (SHY) absorbed the most assets, recording net inflows of $756 million. The second place is occupied by the iShares Floating Rate Bond ETF (FLOT) with $369 million in net inflows, according to the ETF database.

With respect to long-term bond ETFs, the iShares 20+ Year Treasury Bond ETF (TLT)the second-largest in the category, leads the pack with $4.81 billion in net new assets over a four-week period, according to ETF Database.

TLT is followed by the Vanguard Long-Term Corporate Bond ETF (VCLT) and the SPDR Portfolio Long-Term Treasury ETF (SPTL)which took in $634 million and $223 million, respectively, during the same period.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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