Holding Tight In T-Bond ETFs

August 03, 2011

With
U.S. budget talks roiling markets and the economy weakening, I got curious about ETF investor confidence in long-term Treasurys.

I looked at asset flows and short interest in long-term Treasurys ETFs to gauge investor sentiment.  At the outset, I expected some skittishness; after all, the
U.S. economy is in pretty rough shape. The debt-to-GDP ratio is historically high, and the recent political wrangling in
Washington, D.C., hasn’t exactly reassured anyone about the capabilities of politicians in the capital.

Even if you don’t doubt the ability of
Washington to make good on its long-term debts, there are plenty of foreseeable scenarios where Treasurys would lose value. At the very least, with interest rates at historical lows, any sign of a real uptick in core inflation could swiftly cause the value of long-dated
U.S. government debt to crater.

Despite all this, Treasurys have had something of a rally lately: the Barclays Capital U.S. 20+ Year Treasury Bond Index is up more than 9 percent over the past three months. Considering the global picture, including the eurozone debt crisis and flagging
U.S. growth, Treasurys seem to be benefiting from a flight-to-safety trade.

In any case, in order to gauge how the ETF market was digesting all the news, I looked at asset flows in two of the most popular Treasury-related ETFs: the iShares Barclays 20+ Year Treasury Bond Fund (NYSE Arca: TLT) and the ProShares UltraShort 20+ Year Treasury (NYSE Arca: TBT).

These are the biggest names in the world of Treasurys ETFs, on both the long- and short- side. In fact, the ProShares double-short fund is the most popular leveraged and inverse ETF in the world, with close to $6 billion in assets.  So, how has the ETF world responded to all the unsettling news?

Looking at flows, the reaction has been muted. In July, the iShares Treasurys fund, TLT, lost about $129 million to redemptions, or 4.5 percent of assets. Meanwhile, the inverse and 2X leveraged ProShares fund, TBT, gained $216 million, which amounted to 3.7 percent of its assets. That suggests that, net-net, there was a bearish move in the ETF market—assets flowed out of a long fund and into a short. But, as a percentage of assets, the move was small. Apparently, people weren’t that rattled by alarmist headlines.

The other metric I took a look at was short interest in the iShares fund, TLT. Short interest numbers tell you how many people are actively betting on a drop in the price of the ETF, which is a proxy for 20+ year Treasurys.

Short-interest data are only published twice a month, so up-to-the-minute data aren’t available, and they’re “buggy,” as Dave Nadig likes to say. But, as of July 15, there were 20 million shares of TLT being sold short, or about 66 percent of its outstanding float.

That’s high—10 times higher than the average ETF, in fact—but the figure is also lower than it’s been in recent months. What that means is that, while plenty of people are still betting on a drop in the price of long-term Treasurys, fewer people were making that bet in mid-July than were making it at the end of May.

So, despite recent rockiness in the United States, the ETF market as a whole has moved only marginally away from holding long-term
U.S. debt. In fact, in ETFs, as in the world at large, it’s clear that plenty of people are willing to stick it out for the long haul.

What’s less clear is whether that’s because U.S. debt is still fundamentally attractive, or because it’s merely the least bitter pill to swallow in the current global financial situation.

 

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