Investors who recently invested in exchange-traded funds (ETFs) to tap into the fixed-income market have showcased a clear inclination towards government bonds. State Street Global Advisors reports that in September, a total of $10 billion flowed into bonds, out of which a staggering 92% was attributed to government bond exposures. Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, highlights that approximately $5 billion of the inflow was directed towards “ultra-short” bonds.
While long-term Treasury bonds have experienced a downward trend throughout this year, largely due to a surge in yields, short-term Treasuries have fared comparatively better. On Tuesday, shares of the iShares 20+ Year Treasury Bond ETF (TLT) fell over 2%, resulting in a 12.5% loss for the year according to FactSet data.
On the other hand, the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) remained relatively stable on Tuesday afternoon. FactSet data reveals that the fund has delivered a noteworthy 3.6% return year-to-date. Similarly, although the iShares 1-3 Year Treasury Bond ETF (SHY) experienced a slight decline of around 0.1% on Tuesday afternoon, it has achieved a commendable year-to-date gain of approximately 1.5% based on total returns.
It is worth noting that these trends have emerged as investors grapple with the projection of the Federal Reserve maintaining higher interest rates for an extended period. This has played a significant role in reshaping the dynamics of the fixed-income market.
Read: ETFs that buy long-term Treasury bonds drop sharply after Fed signals higher for longer rates
Government Bond Flows Continue to Drive Market
Ultra-short and short-term government bonds have maintained their position as the driving force behind flows within the government debt market, according to a note by Bartolini. This trend was also evident in the bond-ETF flows observed in August, with investors showing a preference for short-duration fixed income.
Corporate Bonds Experience Outflows
In contrast to government bonds, both investment-grade and high-yield corporate bonds experienced outflows in September. State Street reported that investors withdrew nearly $3.8 billion from investment-grade corporate bonds last month, representing a significant departure from the year-to-date trend. Similarly, high-yield corporate bonds faced $1.5 billion of outflows in September, despite their positive returns of 5.8% attributable to carry effects from higher coupons.
U.S. Treasury Yields Remain Attractive
U.S. Treasurys, often considered the risk-free rate, continue to offer yields exceeding 5% for debt with ultra-short and short-term durations. For instance, the two-year Treasury yields rose 3.8 basis points to reach 5.148% on Tuesday. Meanwhile, the yield on the three-month T-bill was trading at 5.5% on Tuesday afternoon.
Notably, both these levels surpass the 10-year Treasury yield, which reached its highest rate since August 2007, surging 11.9 basis points to 4.801% on Tuesday. Additionally, thirty-year yields experienced a significant increase of 14.2 basis points to reach 4.936%, marking the highest rate since September 20, 2007.
Overall, the government bond market continues to thrive while corporate bonds face challenging times. Given the attractive yields offered by U.S. Treasurys, investors can find opportunities in short-duration fixed income investments for potentially favorable returns.