Investors dumped exchange-traded funds that invest in bonds ahead of Wednesday's Federal Reserve statement on concern officials would get closer to raising interest rates.
Investors pulled $6.1 billion this month from bond ETFs through March 16, or 1.9% of total fund assets, according to TrimTabs Investment Research data. If withdrawals continue at that pace it would surpass the record $8.6 billion monthly outflow those funds recorded in June 2013, after the Fed signaled when it might start winding down its bond-buying program.
The sellers of Treasury-bond ETFs missed a rally after the Fed on Wednesday released its latest policy statement and
indicated it would keep a slow pace when it starts raising rates. That pushed yields on the 10-year Treasury note down to 1.95% Wednesday afternoon in New York. In 2013, the so-called taper tantrum sent the yield on the 10-year note soaring to 2.61% on June 25 from 1.63% eight weeks earlier, imposing steep losses on bondholders.
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“When interest rates go up, the prices of current bonds go down,” David Santschi, chief executive officer of TrimTabs, said. “The outflows are happening mostly because institutional investors are concerned the Fed will raise rates in the middle of this year rather than later this year or early next year.”
SHIFT IN EXPECTATIONS
Investors yanked cash from a different set of funds this time around, which highlights a shift in expectations about monetary policy. The biggest outflows this month have come from funds investing in U.S. government debt and bonds with longer duration, a gauge of interest-rate risk. The widespread rout in June 2013 hit emerging-market bond funds particularly hard, as they lost 11% of their market value on concern that liquidity would dry up.
“In a rate tightening, you would move out of long-term bonds because that stuff gets hit worst,” said Eric Lichtenstein, senior managing director for Cantor Fitzgerald's ETF business.
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Government-bond funds have seen withdrawals of about $3.6 billion this month, or 7.4% of fund assets, according to data compiled by Bloomberg. Long-term bond funds have lost $1.2 billion, or 6.4% of their assets.
The iShares 20+ Year Treasury Bond ETF has lost 17% of its asset size this month. It recently closed out its biggest three-week withdrawal since its inception in 2002.
DRASTIC DECISIONS
Still, “no one's making drastic decisions,” said Mr. Lichtenstein. “It's really parsing the Fed, and selling bonds to buy equities, because they don't want to miss the next 3% move.”
The Fed's statement came at the end of its latest two-day policy committee meeting. It said the Fed is “unlikely” to raise rates at its April meeting but could do so as soon as June if the central bank sees further labor-market improvement and is “reasonably confident” that inflation will rise.
ETFs investing in global stocks have brought in $26 billion of investor cash so far this month, or 1.6% of their asset value.
The broader bond-ETF outflows seen in March follow five consecutive months of inflows totaling $46.8 billion, or 11.7% of fund assets, according to a March 16 TrimTabs report.
