ETF Buyers Race to Short-Term Treasuries for Yield, Safety

Investors stormed into Treasury bond funds in 2018, as they tried to balance the need for yield with the desire for safety in an increasingly risky world.

A record $53 billion has poured into exchange-traded funds tracking government debt this year. The clear winners are funds stuffed with ultra-short-term credit, which had taken in over $32 billion through Dec. 24, more than tripling the previous peak from five years ago.

Rising interest rates, heightened stock market volatility and slowing global economic growth have pushed bond buyers toward safer securities. And with a flattening yield curve, short-dated government debt has given investors more yield for much less duration risk.

“This is an environment where you want to be on the front end, stay liquid, high quality, and know what you own,” Heather Brownlie, U.S. head of fixed income for BlackRock Inc.’s iShares business, said at a Bloomberg ETF conference earlier this month. “Clearly the market is voting with its feet here, which is: Treasuries and cash are finally a really viable option, you can get 2.5 percent for half a year duration or less.”

(Related: How to Play the Bond Market as the Yield Curve Flattens)

Even as the Federal Reserve signals a slower rate-hike path, Chairman Jerome Powell recently disappointed investors who were hoping for even more dovishness. Still, further rate hikes are likely to come in 2019 and investors are expected to remain eager to park cash, said Mohit Bajaj, director of ETFs at WallachBeth Capital. With these short-term products, traders can get a guaranteed yield instead of taking on the risk of getting whipsawed by market volatility, he said.

Going Active

The popularity of short-term ETFs has also given a massive boost to flows into actively-managed bond funds this year. The group has taken in more than $20 billion through Dec. 24, about twice last year’s cash infusion and more than three times the flows from the year prior.

Two of the top 10 fixed-income funds this year in terms of flows are actively managed with very short-term portfolios. The $5 billion JPMorgan Ultra-Short Income ETF, ticker JPST, has taken in close to $4.9 billion in 2018, which is about 98 percent of its total assets. And investors added $4.2 billion to the $12 billion PIMCO Enhanced Short Maturity Active Exchange-Traded Fund, ticker MINT, which is the world’s largest actively managed ETF and targets investment-grade securities with an average duration under one year.

(Related: Advisors Make the Case for Short-Term CDs, Bonds and Treasury Bills)

With the market expected to be riddled with volatility and growth concerns in 2019, there will be increased demand for active funds that have the flexibility to fine-tune credit exposure, Jerome Schneider, head of short-term bond portfolios at Pimco, said at the Bloomberg conference.