On Thursday, the $27.3 billion iShares 20+ Year Treasury Bond ETF (TLT) saw its second-largest inflow ever, with a gain of $1.5 billion, Bloomberg reported. And $851 million of that came from a single transaction after market close.
The exchange-traded fund’s sizable inflow could mean investors are prepping for a recession. The day before, Federal Reserve Chairman Jerome Powell said the Fed could slow its interest rate hikes as early as at its Dec. 13-14 meeting, which sparked an overall bond rally.
So far this year, TLT has had the fourth-largest inflows, as of Nov. 29, of any U.S.-listed ETF and the largest year-to-date inflows of any U.S.-listed fixed income ETF, pulling in $16.4 billion through Dec. 2. And although it hasn’t overtaken U.S. equities in terms of year-to-date inflows, U.S. fixed income ETFs are seeing the most year-to-date inflows that they have in a while when compared with the same time period in prior years.
“As we've seen in the past in monetary tightening cycles, at some point midway through that cycle, you're generally well-rewarded to start extending duration and essentially fading the front end of the yield curve,” Bob Smith, president and chief investment officer of Austin-based Sage Advisory, told ETF.com. “One of the easiest, quickest ways to do that is in the TLT.”
“TLT is U.S. Treasuries, and there is a fair amount of interest in buying or starting to position for the back end of the yield curve, off the back of some of the economic reports and some of the commentary by Chairman Powell,” he noted.
Smith further observed that investment-grade corporate debt is looking “very fully priced” in the face of a possible recession, noting that Sage Advisory is likely to keep its exposure to that sector lower relative to mortgage-backed and government securities.
“Recession doesn’t necessarily bode well for credit risk,” he said. And indeed, there was a $3 billion outflow from the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) the Monday before TLT saw its $1.5 billion gain, as reported by Bloomberg.
Smith acknowledged that as the year winds to a close, tax loss harvesting is also occurring, which could account for some of the flows.
“[The flows into TLT are] probably a confluence of several different things: We would argue that the long end of the yield curve has started to become progressively more attractive for people who understand what happens over the course of interest rate cycles,” he said. “Given that we're fairly far along here, I think there's a lot of anticipation that eventually the long end will be more attractive than the short maturities we're seeing today.”
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