Bond ETF Sales Surge as U.S. Ranks Last in World Debt Markets

  • Investors withdraw most from U.S. government ETFs in 14 months
  • Treasuries fall 1.1% in past month to become worst performers

Investors are selling U.S. government bond exchange-traded funds at the fastest pace in 14 months as the Federal Reserve prepares to raise interest rates, helping make Treasuries the worst-performing sovereign market.

Money managers withdrew $4.1 billion from U.S. fixed-income funds in November, the most since September 2014, according to data compiled by Bloomberg. Treasuries have fallen 1.1 percent over the past month, the biggest loss among 26 bond markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.

While Fed officials have stressed they will increase rates at a gradual pace, the withdrawals reflect concern the world’s biggest bond market is vulnerable as policy makers push borrowing costs higher for the first time in almost a decade. Futures contracts indicate there is a growing consensus the central bank will act as soon as its next meeting on Dec. 15-16.

“People are a little bit nervous,” said Roger Bridges, chief global strategist for interest rates and currencies in Sydney at Nikko Asset Management Australia, which oversees the equivalent of $15.2 billion. “I could see rates going up as we go into December, but I don’t really see a massive selloff.” 

The U.S. 10-year note yield fell two basis points to 2.22 percent as of 6:31 a.m. in London on Friday, according to Bloomberg Bond Trader data. The price of the 2.25 percent security due in November 2025 rose 6/32, or $1.88 per $1,000 face amount, to 100 10/32. The yield climbed to 2.37 percent on Nov. 9, the highest level since July 21.

The probability the Fed will increase its benchmark by its Dec. 15-16 meeting is 72 percent, according to futures data compiled by Bloomberg. The calculation is based on the assumption the effective federal funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

The iShares 1-3 Year Treasury Bond ETF had the biggest outflow among U.S. government debt funds in November, at $1.5 billion. Short-term Treasuries are losing appeal because they tend to track what the Fed does with its benchmark, the target for overnight lending between banks.

Policy makers crafted their most recent statement in October to stress it may become appropriate to raise the benchmark in December, and they largely agreed the pace of increases would be slow, according to minutes of the meeting published Nov. 18.

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