ETF Investors Dump Bonds as BlackRock Sees September Liftoff

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Investors in U.S. exchange-traded funds have sold the most bonds in June in nine months. So far, it’s proving to be a winning bet.

They pulled $1.44 billion out of fixed-income funds since May 31, on course for the biggest monthly withdrawal since September, according to the latest data compiled by Bloomberg.

With everyone getting ready for the Federal Reserve to raise interest rates, Treasuries have fallen almost 1 percent since the end of May, based on Bloomberg World Bond Indexes. That’s set to be the biggest monthly decline since February. BlackRock Inc., the world’s largest money manager, says the Fed will act this year.

“September is the most likely time for a start,” Rick Rieder, chief investment officer of fundamental fixed income at BlackRock in New York, wrote in a report Friday. Rising yields on long-term Treasuries “have approached close to a fair value levels,” he said.

The Fed signaled after a meeting Wednesday that a pickup in the economy is keeping it on track to boost borrowing costs by year-end, though subsequent increases will probably be more gradual than anticipated earlier.

Yields on benchmark 10-year U.S. notes have to 2.26 percent from this year’s low of 1.64 percent set in January.

Betting against bonds isn’t without risks.

Treasuries are headed for a second weekly gain, trimming this month’s losses, as the threat of a default in Greece increased demand for the relative safety of U.S. government debt.

Uneven Recovery

“The increased talk about the Fed preparing lift-off is making people pull out some money from fixed income,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “Greece is definitely at the center of everything right now.” If a deal isn’t reached “you will see a lot of uncertainty. The Fed likely delaying the rate hike and clearly lower yields.”

Greece may be forced to leave the euro currency bloc, which would be even more reason to hold U.S. government debt, said Hajime Nagata, who invests in Treasuries for Diam Co. in Tokyo.

What’s more, the U.S. economic growth is uneven enough that it may prevent the central bank from moving rates too quickly, Nagata said. “I don’t think the Fed really wants to lift off” he said.

The average maturity of bonds held by Diam is longer than that of the index it uses to gauge performance, he said, favoring the securities that will gain most if yields fall.

BlackRock’s Rieder said a “negative resolution” of the Greek situation may bring 10-year yields down 15 to 20 basis points, according to his report.

With Greece and its creditors stuck in a stalemate that’s becoming increasingly bitter, investors selling bonds might consider hanging on to at least some of them.

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