(Bloomberg) -- Wall Street divisions are growing on what’s next for the beaten-up world of Treasuries as the Federal Reserve’s aggressive tightening ramps up the risk of a recession by the day.
The latest sign: ETF investors are lavishing their billions on funds that track both the short- and the long-end of the yield curve.
Some $13 billion has now flooded the biggest cash-like exchange-traded fund this year, the SPDR Bloomberg 1-3 Month T-Bill ETF (ticker BIL). The product is in hot demand as it offers the most attractive yields in over a decade with little interest-rate risk to boot, squashing the “There Is No Alternative” mantra that has favored equities over much of the last decade.
At the same time traders have sunk a similar amount into the iShares 20+ Year Treasury Bond ETF (TLT), a long-duration bond strategy that in theory it stands to benefit in any oncoming economic downturn. TLT has absorbed the most new cash of any fixed-income ETF this year despite historic losses spurred by the Fed’s supersized rate hikes.
Just $49 million separates the products’ inflows so far in 2022, underscoring how divided fixed-income investors are right now when it comes to taking duration, or interest rate, risk.
“Fixed-income has yield and so do short-term Treasuries. Demand for flows is coming from that,” said Bloomberg Intelligence ETF analyst James Seyffart. On the other end of the yield curve, “if you believe the Fed isn’t going to hike as aggressively as is priced or if you believe the Fed will also cut rates in the future -- TLT is very high duration and will benefit a lot from that.”
Another way of thinking about it: Some portfolio managers are likely splitting their allocations between the short- and long-end -- without making a big call on when rates will peak in a so-called barbell strategy.
High-conviction wagers on where bond yields will go next are hard to make, between inflation still at decade highs and growing signs of economic trouble such as the faltering credit and real-estate markets. Some traders are potentially combining heavy positions in cash-like assets with exposures to longer-duration bonds that are likely beneficiaries should the Fed cut rates in the event of a recession.
TLT has already lost more than 36% in 2022 on a total return basis through Friday’s close. Increasingly, options traders have been positioning for an end to the pain for the ultimate haven asset.
The turmoil on Wall Street has also spurred renewed investor appetite in cash-like ETFs such as BIL, which boasts virtually flat returns so far in 2022 -- quite the accomplishment in a year when government bonds are nursing enormous losses while the S&P 500 remains mired in bear-market territory. That backdrop bodes well for funds such as BIL, according to Todd Sohn of Strategas Securities.
“It’s defensive posturing away from a very volatile equity market as well as actually receiving a nominal yield on those instruments,” said Sohn, ETF strategist with the firm. “You can basically allocate there and sit, largely stress-free.”
