Treasury ETFs Inflows Outpacing All Other Bond Funds This Month

Exchange-traded funds that hold U.S. Treasuries are seeing more cash inflows this month than any other fixed-income funds for the first time this year.

U.S. government debt ETFs have brought in $1.5 billion since March, according to Bloomberg data. If that trend holds, it will be the first time since October that inflows into the funds will outpace those of other bond ETFs.

The inflows suggest investors are heading for cover as they pull cash from ETFs investing in U.S. stocks, which lost $5.8 billion in the first three weeks of April, even as the Nasdaq Composite Index climbed to a record high.

“There seems to be a broader trend of people lowering their risk,” said Eric Balchunas, an analyst with Bloomberg Intelligence.

Most of the cash went into the iShares 1-3 Year Treasury Bond ETF, which trades under the ticker SHY and has $8.7 billion in assets. That indicates investors are more worried about the outlook for risky assets and liquidity in the bond market, and less concerned about the potential for a rate increase from the Federal Reserve at its meeting this week. Most economists expect the Fed to raise rates at their meeting in September, according to a recent poll.

“The worry is that if the Fed does surprise, there may be some liquidity problems in riskier assets,” said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, one of 22 primary dealers that trade with the Fed. Investors “don’t want to be a forced seller if there’s low liquidity.”

Market Shelter

The iShares fund has brought in $951 million this month as of Friday, or 12 percent of its market capitalization, according to Bloomberg data. Most of that came on April 16, when it picked up $722 million of cash. That could mean that a large investor was reducing the amount of risk in its portfolio, said Balchunas. For large institutions, SHY is often a proxy for cash, he said, since the securities are easily traded and aren’t considered to be a strong bet on interest rates.

’’It’s a shelter from everything,’’ said Balchunas.

About 1.1 million shares of that fund have traded each day in the past month. While ETFs like the iShares 20+ Year Treasury Bond Fund trade more often than SHY, its cost to trade is among the lowest, with a bid-ask spread of one cent.

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