Short-Term Treasury ETFs Attract Flows on Inflation Fears

President-elect Donald Trump’s win was bullish for stocks and cryptocurrency but bearish for rate-sensitive fixed-income funds like the iShares 20+ Year Treasury Bond ETF (TLT), which had plunged nearly 3% on heavy trading volume Wednesday.  

The massive selloff for the long-term bond market proxy indicates investors fear a potential inflationary Trump term as tax stimulus and tariff plans threaten to raise prices on consumer goods. 

Fixed-income investors had already begun to expect higher-for-longer rates and inflation prior to the election as funds like the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL), which combines high yields and low interest rate sensitivity, led all bond ETFs with over $350 million of inflows Tuesday.

Fixed Income ETF Fund Flows: Nov. 5, 2024

While the Fed is widely expected to cut its key rate by 25 basis points today, the bond market has lowered its expectations of a rate cut at its next meeting in December, as the Fed Funds Futures market now projects a 70% probability of a 25-bp reduction, down from 80% a month ago. 

With the election in the rear view, the bond market will shift its attention to Fed Chair Jerome Powell’s speech this afternoon for clues about the future path of inflation and rate cuts.

How Tariffs Affect the Bond Market

Tariffs can significantly impact the bond market by influencing inflation expectations, interest rates, and investor sentiment. When tariffs increase prices on imports, they can lead to inflationary pressures. As inflation rises, the Federal Reserve may respond by pausing its rate cut cycle or by raising interest rates to prevent the economy from overheating.  

Higher interest rates generally cause bond prices to fall, as newly issued bonds offer higher yields than existing ones. This can decrease the value of bonds and bond ETFs in investors’ portfolios, particularly affecting long-term bonds and ETFs that are more sensitive to interest rate changes.  

Additionally, tariffs can introduce uncertainty into the market, which can reduce demand for riskier assets and push investors toward the relative safety of short-term government bonds or gold.