Last month, investors were dumping their Treasury bills like hot potatoes. The evidence was clear in the exchange-traded fund (ETF) space—during first week of March, bond ETFs saw US$3 billion flow out according to Bloomberg, pretty much erasing February’s inflows. The US$6.4 billion iShares 7-10 Year Treasury Bond ETF took the biggest hit as investors began rebalancing in the wake of an interest rate hike from the Fed. Some even headed over to ETFs that follow a strategy betting against Treasuries in an effort to cash in on rising rates and declining demand for Treasuries.
The hike never happened—and investors betting against Treasuries have paid the price.
According to the folks at Bloomberg nine of the 10 biggest ETF losers in the U.S. debt market were those following a strategy of betting against Treasuries. For example, one of the hardest hit was the iPath U.S. Treasury 10-year Bear ETN, which has dropped 20 percent in 2015 Bloomberg reports.
The trouble is Treasuries are more popular than ever—demand is growing because, compared to Japan and Europe, they’re still the best game in town when it comes to yields. And increasingly people are questioning the strength of the U.S. recovery—job growth slowed to 126,000 in March and some investors have pushed out their rate hike forecast as far as December.
In the grand scheme of things, U.S. government securities haven’t done too badly this year, returning 2%. Still, no one can seem to agree when the rate hike will come—and what its impact will be on markets overall.
This was the subject of a column by David Rosenberg in today’s edition of The Globe and Mail (subscription required), in which he advises investors have nothing to fear from the first rate hike—rather the endgame should be the last rate hike, which will be the one the market feels most acutely.
According to Rosenberg, that won’t happen until 2018.
How this plays out in the bond space will be interesting—and ETFs will continue to provide them with a real time space to play out their views.