SGOV, Ultra-Short Bond ETF Flows Rise on Inflation Data
High yields and low-rate sensitivity attract fixed-income investors.
Economic data pointing to higher-for-longer inflation and rates are pushing Treasury yields higher, making ultra-short-term bond funds like the iShares 0-3 Month Treasury Bond ETF (SGOV) more attractive compared to long-term bond ETFs.
While inflation has been trending lower, the disinflationary pace has been slower than fixed-income investors expected.
For example, last week’s Consumer Price Index (CPI) data revealed that November inflation rose 0.3%, slightly accelerating from +0.2% in each of the previous four months. The annual rate of inflation rose to 2.7% from 2.6% the prior month.
While today’s inflation rate is far lower than the 40-year high of 9.1% in June of 2022, it’s still higher than the Fed’s 2.0% target and appears to be stalling.
All the above, plus the inflationary potential of President-elect Trump’s tariff and tax cut plans, have fixed-income investors favoring the high-yield, low-interest rate sensitivity of ultra-short-term bond ETFs.
SGOV vs TLT: Flows and Rates
The combined one-month fund flows for top ultra-short bond ETFs SGOV and the JPMorgan Ultra-Short Income ETF (JPST) amount to a total gain of more than $3 billion, according to the etf.com Pulse tool.
This compares to nearly $9 billion in combined outflows from the top long-term bond ETFs, the iShares 20+ Year Treasury Bond ETF (TLT) and the Vanguard Long-Term Treasury Index ETF (VGLT).
When inflation is high, ultra-short-term bonds are more attractive than long-term bonds because their shorter maturities reduce the impact of rising interest rates on their prices, preserving capital value. Additionally, they can quickly adjust to higher yields as older bonds mature and are replaced with newer, higher-yielding issues, offering better alignment with inflationary conditions.
Ultra-Short-Term Bond ETFs and Inflation
Ultra-short-term bond ETFs, which invest in bonds with maturities typically under a year, offer several benefits that align with investor needs during times of high inflation and rates.
- Attractive Yields: With central banks keeping interest rates elevated to combat inflation, short-term bonds now offer competitive yields compared to longer-term bonds without the same level of interest rate risk.
- Low-Interest Rate Sensitivity: The short durations of these bonds mean their prices are less sensitive to interest rate fluctuations, providing stability in portfolios.
- Liquidity and Flexibility: Ultra-short-term bond ETFs provide investors with a liquid and diversified way to park cash while earning a better return than traditional savings accounts or money market funds.
- Risk-Aversion: Given ongoing market volatility, investors often seek out safer fixed-income assets, and ultra-short-term ETFs fit this profile by offering a balance of yield and security.
As long as interest rates remain elevated and uncertainty persists, these ETFs are likely to remain popular with both retail and institutional investors looking for low-risk income options.
