May Inflows Into IEI, UST Now Reversing

June 05, 2013

The fate of two Treasurys ETFs in the past month tells the tale of rising angst about the rate outlook.

 

Last month’s large inflows into some intermediate-term bond funds is reversing, suggesting views are currently growing that the Federal Reserve may begin—sooner, rather than later—to wind down its extraordinary easy-money policies that have been in place in the five years since the stock market collapsed in the fall of 2008.

Investors have yanked more than $1.25 billion from the iShares Barclays 3-7 Year Treasury Bond Fund (NYSEArca: IEI) in the past two days, essentially wiping out much of the flows into the fund about a month ago.

Additionally, the double-exposure ProShares Ultra 7-10 Year Treasury ETF (NYSEArca: UST) recorded redemptions on June 4 of almost $450 million, making it the most unpopular U.S.-listed ETF yesterday, and providing another clue that some investors, likely institutions, are rethinking their outlook on the Fed policy.

Flows into those very same funds at the beginning of May served as signs Fed Chairman Ben Bernanke should be taken at his word that all the monetary accommodation was not going away soon. But his comments toward the middle of the month that the beginning of the end of quantitative easing could come later this year sparked selling in stocks and a push above 2 percent on 10-year Treasury yields. The latest redemptions are part of that backlash.

Of course, what ultimately happens, and when it happens, remains a matter of guesswork. Data such as this Friday’s May jobs report are becoming more pivotal than ever, not least because Bernanke has said the unemployment needs to fall to 6.5 percent before the tap of liquidity for the economy can begin to be turned off.

“At this point I’m kind of numb to it,” said Gene Koyfman, an ETF analyst at IndexUniverse whose specialty is fixed-income funds.

“Nothing has happened to suggest some paradigm shift has occurred,” he added, saying that while a genuine economic recovery is taking shape, he isn’t expecting some sudden change that would require a quick shift by the Fed.

 

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