Investors Abandoning T-Bills and Treasury Bonds As Yields Soar

Traders are running away from long-term government bonds, but Treasury bill ETFs have seen the greatest outflows.
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The story of the market continues to be interest rates and inflation expectations. Treasury yields are taking a bit of a breather today, but there's still no indication that we've hit a near-term top just yet.

The Fed has done what it can to strike a dovish tone for the bond market and said it will continue using the tools it has to keep interest rates in check. That, so far, hasn't done much to suppress the rise of interest and investors are running for the exits.

Long-dated Treasury ETFs, not surprisingly, have seen significant outflows in 2021, but perhaps more curious is the fact that Treasury bills are seeing even greater outflows.

Treasury ETF Flows

Treasury ETF Flows

For the iShares 20+ Year Treasury Bond ETF (TLT), the iShares 10-20 Year Treasury Bond ETF (TLH) and the iShares 7-10 Year Treasury Bond ETF (IEF), the clear catalyst is performance. IEF is down a comparatively modest 6% year-to-date, but the two longer maturity ETFs are double figures in the red.

Treasury ETF 2021 Performance

Treasury ETF 2021 Performance

TLT, in particular, is down more than 20% from its all-time high achieved in the summer of 2020. Does this mean the multi-decade bull market in bonds is officially over? I wouldn't say that just yet. Keep in mind that junk bonds are still near all-time highs. Also, I want to see where the next leg of interest rate movement takes us. If the 10-year yield moves up to 2%, I think the answer is yes given what inflation expectations are for the next 1-2 years. The Fed, however, is a strong influence on the financial markets and I can still see the central bank finding a way to institute some form of yield curve control.

10-Year Treasury Yield

10-Year Treasury Yield

But how do we explain the exodus from Treasury bills. The interest rate on these is 0%, but that's been the case for a while, so I don't think it's investors suddenly shifting money in search of higher yields (although that's probably occurring to some minor degree).

It feels like more of a rotation from fixed income into equities. Stocks continue to push to new all-time highs and there are several surveys out there showing that investors have as high a portfolio allocation to stocks right now as they ever have. That money is probably coming out of portfolio cash positions to try to take advantage of the rally in small-caps and cyclicals. Dividend ETFs are also starting to draw inflows again as they're also heavily positioned in cyclical sectors.

I expect the 10-year yield to continue moving towards the 2% level at some point in 2020, although not nearly at as rapid a pace as it has been recently. Look for money to continue the rotation out of fixed income & cash and into stocks as long as there isn't a sudden reversal of course.

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