Photographer: Julia Schmalz

Long Treasury ETF Posts Record Outflow in Duration Rotation

  • iShares 20+ year Treasury Bond ETF hit as Fed taper nears
  • Foreigners, pension funds seen bidding up long-dated debt

Some investors are paring exposure to longer-maturity U.S. debt as the Federal Reserve moves closer to normalizing borrowing conditions in the midst of a leadership transition.

Money managers pulled $1.2 billion from the iShares 20+ year Treasury Bond ETF last week, the most on record, and the second-largest withdrawal among U.S.-listed exchange-traded funds across asset classes.

The diminished appetite reduced the assets in the benchmark fund to $7.3 billion, and contrasts the bullish stance toward interest-rate risk by active managers seen in recent weeks. The Treasury yield curve continues to flatten amid muted inflation expectations, while demand for new long-maturity sovereign and corporate paper remains red-hot.


Beneath the surface, however, "it looks like overall there is a mini-duration rotation going on with the long-dated debt ETFs seeing some redemptions and the shorter- and intermediate-term ETFs seeing more inflows," says Eric Balchunas, Bloomberg Intelligence ETF analyst. Duration rises with the maturity of debt and governs how much bond prices will fall as yields rise.

Case in point: The iShares iBoxx $ Investment Grade Corporate Bond ETF was hit by $460 million of outflows last week, its fourth-biggest withdrawal of the year. The $38.6 billion fund has an effective duration of 8.8 years, meaning it’s acutely vulnerable to price swings spurred by interest-rate changes.

By contrast, shorter-maturity Treasury and corporate funds saw inflows last week, including the SPDR Bloomberg Barclays Short Term High Yield ETF, the iShares 0-5 Year Corporate Bond product and SPDR’s 1-3 Month Treasury Bill fund.

Still, duration demand is projected to be in rude health. Foreign investors -- buoyed by the weak dollar and demand from domestic pension funds -- are likely to be rebalancing portfolios amid the equity-market rally. That will make them crucial marginal buyers, according to Deutsche Bank AG strategists.

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