ETF Investors Flock To Short Term Debt

Investors are still flocking to safe haven fixed income assets and shorter-dated bonds in anticipation of rate hikes, which is pushing yields down further and has resulted in U.S. debt selling at zero yield for the first time.

Fixed income ETFs saw global inflows of $11.6 billion – the highest monthly amount since February – in the run-up to the U.S. Federal Reserve’s announcement on interest rates last month. Short-maturity fixed income products, which are less sensitive to rising rates, gained the most traction.

According to BlackRock’s latest report, shorter duration bond ETFs gained $5.7 billion in September, the third month in a row to draw in more than $5 billion to this asset class. Of those flows, 40 percent went to U.S. Treasury ETFs.

The report also found that short-maturity government/corporate debt ETFs scooped up $1.4 billion last month.

The Fed decided to halt interest rates on 17 September, but investors are still speculating that the Fed will raise rates before the end of the year, and the UK is likely to follow suit.

U.S. Treasury yields, on both longer and shorter-dated bonds, have been falling consistently since June 2014 as investors flock to safer assets in anticipation of these hikes. The iShares USD Treasury Bond 1-3 UCITS ETF (IBTS) is up 6.59 percent over one year, while the longer-dated iShares USD Treasury Bond 7-10yr UCITS ETF (IBTM) is up 11 percent over the same period.

The Financial Times reported that $21 billion worth of three-month Treasury bills were sold yesterday with zero percent yield, bringing U.S. sovereign debt yields closer in line with global peers in a world of low rates.

In February Germany sold five-year bonds at a negative yield for the first time, and joins the list of countries, including Switzerland, Japan, Finland and France, that have sold sovereign debt at zero or negative yields.