ETF price movements and asset flows telling the tale of a global economy in transition.
Stock, bond and gold markets were all in an upheaval Thursday following a much-anticipated U.S. Federal Reserve meeting that yielded the answer investors had been looking for. Fed Chairman Ben Bernanke said late Wednesday that moderating bond purchases amounting to $85 billion a month later this year seems to make sense given the central bank’s optimism regarding the U.S. economic outlook.
Both the Dow Jones industrial average and the S&P 500 slipped some 1.5 percent in early trade. Gold prices plummeted below $1,300 an ounce—or 7 percent—to their lowest reading in more than 2 1/2 years, while yields on 10-Year Treasury notes climbed to as high as 2.47 percent at one point, reaching a nearly two-year high.
Oil prices were also sliding and the mortgage-backed securities market was facing investor selling pressure more so than Treasurys, according to a Wall Street Journal’s Money Beat Report. In short, there were no safe havens on Thursday for investors afraid of a world free of the Fed’s “quantitative easing” program to hide.
In the transparent world of ETFs, it’s easy to see just how widespread the panic was at the Fed’s suggestion that the U.S. economy might be getting strong enough to be pulled off of its “QE”-based life support. That’s true in terms of the intraday pricing of ETFs and, in a broader perspective, in terms of investment flows, which on ETFs must be reported daily.
The SPDR S&P 500 (NYSEArca: SPY) gapped lower, dropping 1.5 percent to a two-week low of about $161 a share. Investors had added a net of $1.7 billion to the fund in the first two weeks of June, but Thursday, the $136.5 billion fund was facing a sell-off.
Fed ‘Tapering,’ Gold Tanking
The SPDR Gold Shares (NYSEArca: GLD), the world’s biggest gold ETF, lowered at the opening, dropping 4 percent in early trade as it slid to levels not seen in nearly three years, and gold bullion prices broke through the $1,300-a-troy-ounce mark.
The fund also continued to lose assets. It has now bled $590 million in the past two weeks alone, putting total year-to-date asset losses at $16.93 billion. It ended 2012 as a $72 billion fund.
The Fed seemed to offer for the first time a clearer timeline of when it plans to taper off the massive liquidity it has been pumping into the market through $85 billion a month in bond purchases, saying Wednesday it could moderate those purchases later this year and stop them completely sometime in 2014.
An end of QE would likely result in higher long-term interest rates, which have been pushed to historic lows on account of the Fed’s massive bond-buying program. Roughly a year ago, yields on 10-Year Treasury notes were hovering 1.4 percent.
These low rates have encouraged investors in recent months to pile on risk, taking U.S. equities markets to record highs earlier this year despite an economy that’s still being slowed by relatively high unemployment, huge debt levels, and tighter government spending.
Bernanke is expected to take the pace of the unwinding of this program slowly, but investors have already started to bail out on their fixed income holdings in recent weeks.
So far in June, investors have yanked a net of $5.7 billion out of U.S. fixed income ETFs, according to data compiled by IndexUniverse.
The iShares Barclays 10-20 Year Treasury Bond Fund (NYSEArca: TLH) slipped to its lowest price since March 2012, while its longer-duration counterpart, the $3 billion iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca: TLT) has erased two years of gains to return to levels not seen since August 2011.
In another segment of the bond market, yields on Fannie Mae mortgage-backed securities—those used to guide lenders into the bond market—jumped to 3.21 percent in their biggest move since mid-2009, the Journal reported.
The $6 billion iShares Barclays MBS Bond Fund (NYSEArca: MBB) was trading Thursday at its lowest level since April 2011. It has now slid 3 percent in the past month alone. Similarly, the Vanguard Mortgage-Backed Securities ETF (NYSEArca: VMBS) was revisiting levels not seen in two years.