Short Term Treasury ETFs In Spotlight After Election

November 16, 2016

Donald Trump’s electoral victory has had an immediate impact on the Treasury curve, pushing longer-dated yields higher amid expectations that the president-elect’s push for tax cuts and increased infrastructure spending will trigger inflation.

The market is said to be pricing in a 95% chance of a rate hike in December now, and the 10-year Treasury yield jumped some 21% in one week, going from 1.83% the day before the election, Nov. 7, to 2.22% a week later—its highest read since early January.

As BlackRock’s Richard Turnill said in a commentary this week, “Reflationary environments—characterized by stronger nominal economic growth—tend to help boost assets such as commodities and value stocks and hurt many perceived safe havens.”

‘Reflation Theme Building’

“A reflation theme is building amid signs of rising price pressures, central banks signaling a greater tolerance to let inflation run hotter and policy emphasis shifting to fiscal stimulus. We see Donald Trump’s election to the U.S. presidency and the Republican majority in Congress amplifying this dynamic in the short term,” he said.

In the ETF market, short-dated bond funds are in the limelight on the heels of the election, benefiting from the steepening of the curve. The longer dated a bond is, the more sensitive it is to changes in interest rates, thus the renewed demand for shorter-term exposure.

The iShares 1-3 Year Treasury Bond ETF (SHY) is the largest—$11 billion in assets—and most liquid short-dated Treasury ETF in the market today. SHY has gathered $119 million in fresh net assets in the past week alone.

To put those net creations into perspective, consider that SHY had been a net asset loser so far in 2016, up to the day before the election. And here’s how it’s been performing in 2016 relative to the iShares 20+ Year Treasury Bond ETF (TLT):

As an investor, if you are taking another look at short-term Treasury ETFs, SHY is the biggest short-term Treasury fund, and the most liquid, but not the only one. There are four ETFs competing in this segment, as well as a pair of bull/bear strategies. Here’s how these funds compare:

 

 

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