Treasury ETF Surges, Assets Follow

October 10, 2019

Betting on duration has been a phenomenal play for fixed income ETF investors.

The iShares 20+ Year Treasury Bond ETF (TLT)—the largest ETF to invest in U.S. Treasuries with remaining maturities of 20 years or more—has raced higher in the past year, tallying gains of 30% in 12 months.

Compare that run with that of the S&P 500’s as measured by the SPDR S&P 500 ETF Trust (SPY), which is up only 3% in the same period.

 

Chart Courtesy of StockCharts.com

 

Part of the reason TLT has performed so well is the fact that the Treasury yield curve has been very flat to tilting negative at times this year. Today two-year Treasuries yield 1.42%; 10-year yields 1.54%. That narrow spread was briefly inverted in August, and in shorter maturities, the curve has been flat to inverted throughout the year.

Any normalization and steepening of the curve with yields on longer-dated bonds going up would likely reverse this performance trend. But for now, technical analysis and the broader outlook is for low rates to persist, market pundits say. 

Assets Rush Into TLT

Who knew a bond allocation could deliver such as performance punch? Traditionally, a fixed income allocation is for diversification, low correlation to other assets, and safety in the form of steady income.

But in the past year, taking on duration risk has been a source of massive outperformance. And investors have taken notice.   

In the past year, more than $8 billion of fresh net assets have flown into TLT, just about all of it coming in year to date. The fund is now a $19 billion ETF.

This type of demand isn’t business as usual for this Treasury fund. Look at the creations/redemptions TLT has seen in recent years—nothing comes even close:

 

Year Net Asset Flows
2019 $8 Billion
2018 $1.6 Billion
2017 $1.4 Billion
2016 -$1 Billion
2015 -$20 Million
2014 $3.3 Billion
2013 -$420 Million

Sources: ETF.com, FactSet data

 

This uptick in demand for longer duration is centered on a troubling macro picture that includes a global economic slowdown, fears of recession, geopolitical risk and increased market volatility. If buying long-dated Treasuries is a safety play, the $8 billion into TLT suggests investors are feeling quite defensive.

There are other factors, too, fixed income analyst J.R. Rieger points out. For starters, $13 trillion in negative-yielding bonds globally has been pushing demand for yield into the U.S. Treasury market. A 30-year U.S. Treasury today yields about 2.04%.

Lack of meaningful inflation and a strong U.S. dollar have also contributed to appetite for investment-grade bonds in general, Rieger, who runs The Rieger Report, said.

“Duration paid off for investors as rates have come down and central banks continue to lever the only tool they have—rate cuts—to stave off recession,” Rieger said. “It’s a unique and likely unexpected situation that drove long bonds up nicely.”

Role Of ETF Structure

The surge in demand for TLT could also be attributed to the ETF wrapper itself.

“ETFs have gained traction as tools for institutions that can now easily and at low cost shift assets tactically as they see fit," Rieger said, noting that bond ETFs such as TLT are benefiting from institutional demand as “pension funds are changing their return targets downward and accepting lower yields on the long end to match liabilities with assets."

“Being fluid enough to exit when rates do rise is another benefit of using ETFs as exposure,” he added. "We can't ignore that the tools have changed.”

Contact Cinthia Murphy at [email protected]

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