Record 38% drop in bond ETFs leaves bear traders exhausted

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A brutal wipeout in a $25 billion exchange-traded bond fund has investors betting the worst is over on the eve of a crucial Federal Reserve decision.

The price of the iShares 20+ Year Treasury Bond ETF (ticker TLT) plunged 38% from its August 2020 high in the biggest decline since the fund’s inception in 2002, according to Bloomberg data. Meanwhile, data from IHS Markit Ltd. show that short interest as a percentage of TLT’s outstanding shares fell to a record low of 0.15% on Monday, after hitting 13% earlier this year.

Taken together, the statistics suggest a desire to get back into Treasuries as the Fed targets the highest inflation in a generation. Dizzying price pressures rattled fixed income markets, dragging down companies like TLT. However, as concerns grow that reducing inflation will come at the expense of economic growth, soaring Treasury yields appear to be an entry point, according to Richard Bernstein Advisors. Add to that expectations of a tough corporate earnings season, and the allure of the Treasury market is even more enticing.

“No one is willing to bet on higher rates as growth picks up and the Fed is determined to slow the economy and slow inflation,” said Michael Contopoulos, director of fixed income at Richard Bernstein Advisors. . “The fact that all of this is happening as we are about to enter an earnings recession is making investors even more timid about shorting the long run.”

TLT’s price has fallen nearly 29% so far in 2022, putting the ETF on course for its worst year. Despite the dismal performance, investors have poured nearly $12 billion into the fund since the start of the year, also an annual record. It’s a similar dynamic in the bond ETF arena, which soaked up $118 billion in inflows this year, even though nearly 95% of funds lost.

The Fed is expected to trigger a third consecutive 75 basis point hike at Wednesday’s meeting, alongside policymakers’ new projections for the economy. However, traders weighed the possibility that the central bank could raise rates by a full percentage point after inflation data for August turned hotter than expected.

With ETF traders looking set to buy the bond drop, Strategas Securities’ Todd Sohn says such a move would be premature.

“Maybe some think the worst of the pullback is over,” said Sohn, ETF strategist at Strategas. “But if we still have other surprises – pick a reason: inflation, geopolitical issues, etc. – then there’s still a leg to go.”


This article was provided by Bloomberg News.

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