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ETF Fund Flow: Short Maturity Bonds Asset Gainers, Long Maturity Bonds Asset Losers

10 May 2010 at 12:47 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

Europe’s debt crisis created a short-term windfall for holders of longer-term U.S. Treasuries, particularly holders of iShares 20+Year Treasury (TLT). Yet it’s clear that few believe those price gains will stick.

Short-term bond ETFs that track issues on the shorter end of yield curves experienced $500+ million in net new assets for April. Popular funds in this space included iShares 1-3 Corporate Credit Bond (CSJ) and Vanguard Short-Term Bond ETF (BSV).

At the same time, investors also piled into Short ETFs of longer-term U.S. government treasuries. Last month, as much as $124 billion in net new dollars found a home in funds like ProShares UltraShort 20+ U.S Treasury (TBT) and ProShares UltraShort 7-10 Year U.S. Treasury (PST).

Investors appear to anticipate a steepening of the yield curve for government and investment grade bonds. Perhaps the price of short-term bonds will go up, while the monthly cash flow will decline to negligible amounts. In contrast, the price of long-term bonds may decline, yet the yield may become more attractive down the road.

(Judging by fund flow, the effort to make money is centered on a bit of capital appreciation from the¬†short maturity side¬†and… simultaneously… get some¬†cap app by ultra-shorting the long maturities. Ironically, you’d have to say that fixed income investors have been thinking this way… not just in April… but all year long.)

Here’s how it has worked out so far (1/1/2010-5/10-2010):

Performance For High Net Inflow ETFs in Fixed Income (1/1/2010-5/10/2010)  
            Approx %
iShares 1-3 Year Corproate Credit (CSJ)     0.5%
Vanguard Short-Term Bond (BSV)     1.7%
Vanguard Short-Term Corporate Bond (VCSH)   1.9%
ProShares UltraShort 7-10 Year (PST)     -9.8%
ProShares UltraShort 20 Year+ (TBT)     -13.8%


It appears that investing in short maturity bonds has been a wise decision. In contrast, “ultra-shorting” long-term treasuries… which may make sense in trading situations… has been a bad idea for buy-n-hope asset allocators.

Still, what the fund flow suggests about U.S. bonds is something that we should all keep an eye on; that is, the long end of the yield curve is increasingly unattractive to investors worldwide… all of whom wish to be paid more for the risk they are taking.

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Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above.¬†The company receives advertising compensation¬†from Invesco PowerShares Capital Management, LLC and Geary Advisors, LLC. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Pacific Park Financial, Inc.¬†web site.

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