Long-Duration Bond ETF Sees Record Outflows

As the US stock market surges towards its all-time high, investors give up tracking long-term Treasury bonds and turn to risky assets instead.Data shows that the iShares 20+ year Treasury ETF is experiencing a record outflow in the recent week, with traders withdrawing more than US$1.2 billion. Ten-year US Treasury yields soared during the period, approaching 2%.

The Bank of Montreal wrote in a report last week: “Most of the recent sell-off is undoubtedly the result of prospect for a successful soft landing of the economy, increased inflation expectations and progress in international trade. Even if our underlying cynicism leaves us apprehensive that will ultimately play out, the chance could inspire further long-end cheapening over the near term.”

The easing of international trade tensions and expectations of improving economic growth have boosted the prospects for risky assets. Although Trump has recently downplayed the progress of trade negotiations, the S&P 500 is still hovering near historical high. Data shows that iShares 7-10 US Treasury ETF saw US$553.3 million of outflow last week. “With the risk of recession decreasing, investors are now considering shortening the duration. If possible, the next step may be for the Fed to raise interest rates.”

Signs have shown that the global economic recession has passed the hardest time and the overall climate of the market is changing. Policy makers of major central banks know that they have few space left to further cut interest rates, and in countries with already negative rates are facing growing opposition from the banks and political circles. Many central bank leaders, including Lagarde of ECB and Kuroda of Bank of Japan, are counting governments to assume more responsibilities for stimulating growth.

The central banks may be approaching their limit in reviving the economy. If the financial situation gets stressed out, it may further hurt the economy. Right now, governments and central banks are shifting their focus to how to make more effective coordination by implementing fiscal and monetary policies.