Treasury ETF Exit Is Quickest on Record, Outpacing Taper Tantrum

Investors fled the biggest government bond exchange-traded fund at the fastest pace ever during the recent sovereign-debt selloff.

The $4.3 billion iShares 20+ Year Treasury Bond ETF saw investors withdraw $1.7 billion of cash in the six weeks ended June 5. That was nearly 30 percent of its market capitalization, and the worst six-week string of outflows since its 2002 inception. The exodus left it with a net $1.8 billion of outflows so far this year, the most of any bond fund, according to Bloomberg data.

“It’s going along with the overall Treasury market,” said Aaron Kehoe, managing director of fixed-income operations for Cantor Fitzgerald LP’s ETF business in New York. “You’ve had a decent selloff in the past few weeks.”

In the six weeks ended June 5, 10-year and 30-year U.S. Treasury yields jumped by 0.5 percentage point to the highest in 2015. The declines were sparked by a reversal of a rally in European debt followed by a U.S. jobs report June 5 that beat economist forecasts and added fuel to the selloff.

While investors selling bond funds when yields climb is expected, what’s notable is that the outflows contrast with the so-called “taper tantrum” in 2013, when the bond-market losses were steeper. During that six-week stretch, the 10-year Treasury yield rose 0.54 percentage point but investors sent cash into TLT, which had $760 million of inflows.

Gains Over

Unlike 2013, the Federal Reserve is forecast to raise interest rates months from now, not years. That move would dent returns for long-term bonds. Since the European Central Bank began its bond-buying program in March, prominent money managers helped fuel the global declines by saying most of the gains in international government debt are over.

“It’s more of a normalization of interest rates,” said Marc Pfeffer, senior portfolio manager for CLS Investments LLC in Irvington, New York. “The Fed wants to get off zero” for borrowing costs, and bond-buying in Europe “is working a little better than expected.”

Pfeffer said yields could rise further from their recent levels, with the 10-year note yield reaching 2.45 percent Tuesday in New York, the highest in 2015. But he said he thinks economic growth will remain low and force the Fed to raise rates slowly. Because of that, he said he would buy shares of TLT if the yield on the 10-year note rises to around 2.5 percent.

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