Investors are abandoning short-term Treasury exchange-traded funds as a global cash crunch abates.
Roughly $2.2 billion exited from BlackRock Inc.’s $22.4 billion iShares 1-3 Year Treasury Bond ETF, ticker SHY, on Friday in the biggest one-day outflow since 2014, according to data compiled by Bloomberg. Meanwhile, investors pulled nearly $1.2 billion from State Street Corp.’s $2.7 billion SPDR Portfolio Short Term Treasury ETF, ticker SPTS, for the fund’s largest withdrawal on record.
As a funding squeeze gripped financial markets, short-term Treasury securities became a hot spot, forcing investors to prioritize liquidity above all else. Demand has lessened after the Federal Reserve unleashed unprecedented measures to cushion the economic blow from the coronavirus, from credit-purchasing facilities to dollar swap lines. That helped restore order to global markets and stabilize risk assets, according to James Pillow, managing director at Moors and Cabot Inc.
“Many investors had been using a handful of ultra short-term Treasury ETFs as cash vehicles,” Pillow said. “After U.S. markets had the fastest move out of a bear market in history, it appears as though that bounce was perceived as an all-clear sign for risk assets, as money was pulled from those same Treasury funds.”
At the height of the cash crunch earlier this month, traders were selling even their highest-quality bonds in an effort to raise funds to cover losses in other assets. That sparked demand for the perceived safety of cash-like short-term Treasuries, putting ETFs that track the securities on course for their best month ever..
The Fed was able to stem the sell-off with massive liquidity injections and a pledge to buy investment-grade corporate bonds and certain ETFs. High-grade credit has rebounded as a result. The $38 billion iShares iBoxx $ Investment Grade Corporate Bond fund -- the largest credit ETF -- attracted a record $6.3 billion worth of inflows last week, and posted its biggest weekly rally on record.
In the wake of the Fed’s action, investors were likely eager to take profit with short-dated yields near historic lows, according to Societe Generale’s Subadra Rajappa. Additionally, a hefty schedule of upcoming Treasury auctions is likely denting demand for the front-end, she said.
“Front-end supply, especially bills, should start to ramp up soon, putting pressure on front-end yields,” said Rajappa, SocGen’s head of U.S. rates strategy.
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