Investors Shun Long-Term ETFs as Fed Rate Cut Outlook Worsens

IDTL is nearing $1 billion in outflows in February.

TwitterTwitterTwitter
etf
|
Reviewed by: etf.com Staff
,
Edited by: James Rubin

Investors have shunned long-duration ETFs this month amid growing concerns about the U.S. central bank's interest rate-cutting cycle.

The $7.2 billion iShares $ Treasury Bond 20+yr UCITS ETF (IDTL) recorded $914 million in outflows in February, according to data from ETFbook.

Conversely, the $10.8 billion iShares $ Treasury Bond 1-3yr UCITS ETF (IBTS) posted $295 million in inflows as investors renewed their interest in shorter term yields. 

These flows come as inflation has remained stubbornly above the Federal Reserve's 2% target. The January Consumer Price Index arrived at 3.1%, higher than the expected 2.9% and the Producer Price Index also failed to meet forecasts. Meanwhile, the employment market, a widely watched measure of economic expansion has shown continued strength with unemployment not far off all-time lows. 

These trends have dampened expectations that the Federal Reserve will cut rates as investors had been hoping for late last year as inflation data improved.

According to the CME’s FedWatch Tool, which considers the probability of rate changes, markets are pricing in an 88% chance that the bank will cut rates by just 1% by the end of the year. At the start of the year, markets were pricing in as many as seven rate cuts in 2024.

Bond yields have risen over the past two weeks following the most recent inflation-related reports and amid cautious rhetoric by Fed bankers, including Fed Chair Jerome Powell. 

Good Entry Point

Marko Kolanovic, chief market strategist at JP Morgan, said the uptick in yields could be a good entry point for duration.

“The extent of the re-pricing of Fed expectations, and a historically high share of neutrals in our treasury client survey, means there is scope for yields to decline over the medium term as the uncertainty introduced by recent inflation and labor market data fades,” he said.

According to the latest JP Morgan client survey, 91% of respondents said they expected to increase their bond exposure over the near term.

Bond ETFs in Europe generated a record $63bn inflows in 2023, ahead of the previous high set in 2019, according to data from Invesco.

Theo Andrew joined ETF Stream as a senior reporter in September 2021. He has over four years of investment writing experience spanning pensions and retail investments, most recently at Citywire, where he was a senior reporter covering environmental, social and governance investing.

Loading