‘Buyers’ Strike’ Sees Bond ETFs of Every Stripe Bleed Billions

(Bloomberg) - Investors are offloading exchange-traded funds across the fixed-income spectrum amid a wide-ranging debt selloff.

The two largest high-yield ETFs posted a combined $733 million outflow yesterday, fresh off their biggest weekly withdrawals since February, according to Bloomberg Intelligence data. Another $43 million exited the iShares 20+ Year Treasury Bond ETF (ticker TLT) following last week’s $1.4 billion outflow -- the biggest since March 2020. And investors pulled $920 million from the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD).

Outflows from fixed-income funds are accelerating as traders price in a more aggressive path of monetary policy tightening from the Federal Reserve, with nearly four rate hikes anticipated for 2022. Treasury yields have surged in response, hitting bondholders with losses, roiling equities and sending shockwaves throughout the corporate credit market.

“Flows tend to be reactionary, and with the Fed minutes creating a hawkish surprise, most folks probably took the opportunity to reduce exposure to fixed income,” said Sameer Samana, Wells Fargo Investment Institute senior global market strategist. “Given that rates haven’t peaked yet, it’s probably too early for flows to reverse, especially since rates are only up about 40 to 50 basis points from recent lows.”

TLT plunged 4% last week in its worst performance in a year, with the biggest high-grade and junk funds also sliding. While TLT, LQD, the iShares iBoxx High Yield Corporate Bond ETF (HYG) and the SPDR Bloomberg High Yield Bond ETF (JNK) have steadied, they’re still down since the start of the year.

Fixed-income ETFs are still hanging onto net inflows of $1.3 billion so far in January, compared to December’s nearly $17 billion haul. However, cash is evaporating quickly: roughly $1.9 billion was pulled from bond funds on Monday, Bloomberg data show.

The rapid recalibration of Fed expectations has created a “buyers’ strike” of sorts across bond funds, according to DataTrek Research co-founder Nicholas Colas. The anxiety is centered on the fate of the Fed’s massive balance sheet, with the central bank set to wrap up its bond purchases in March. The Fed may also start allowing its holdings to start shrinking not long after raising interest rates.

“I think it continues until we get more clarity on Fed balance sheet runoff,” Colas said. “There are enough people who remember the taper tantrum.”

By Katie Greifeld


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