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The furious rise in interest rates appears to be fueling a spike in trading for long-term bond products, even those focused on high quality Treasurys. Strategas ETF strategist Todd Sohn said in a note to clients Tuesday that the activity in long-term bond funds like the iShares 20+ Year Treasury Bond ETF (TLT) is starting to resemble a frenzy more typically seen in equity products. “Where we remain surprised by inflows though, is the long duration corner with a record +$46 Bn YTD and two months to go. TLT volumes over recent weeks are rivaling the days of early 2020, and while not an apples-to-apples comparison, we’re reminded of prior ‘crazes’ into hedged equity (2014) and ARK (2020) products. Both eventually burned a fair contingent of holders,” the note said. While many long-term bond funds have seen recent inflows, the iShares 20+ Year Treasury Bond ETF (TLT) is extending its ETF market leadership position. The fund has raked in $20.1 billion so far this year, including almost $3 billion over the past month, according to FactSet. The Ark Innovation ETF (ARKK) , for comparison, brought in nearly $14 billion in the 10 months starting on April 1, 2020, according to FactSet. The fund hit an all-time high in February of 2021 and is down more than 70% from its peak. Trading volume has also spiked. The TLT had an average of 52.8 million shares traded daily in October, according to FactSet. That is more than double the year-to-date daily average through September. Betting on a bottom There are some key differences between TLT and Cathie Wood’s equity funds. The popularity of ARKK was a classic momentum trade, while bond funds have mostly been crushed over the past year. “When you get spikes like that, it’s usually in products that retail and even fast money are trying to bottom fish,” Sohn told CNBC. Yields move opposite of prices, and rising yields tend to hit longer-dated bonds the hardest. As a result, the TLT has lost nearly 14% this year on a total return basis. TLT YTD mountain Long-term bond funds like TLT have fallen sharply in 2023. “It feels like a lot of activity is just looking for the oversold bounce, at least the short-term players. The longer-term allocators may be fearing something in 2024, and that’s why they’re adding duration, when that’s an economic slowdown or something like that,” Sohn added. Long-term interest To be sure, the interest in the TLT is likely coming not just from short-term traders but also long-term investors. For example, the influx of cash despite the losses could be a sign that the higher yields are luring in investors who think this is a good time to lock in those higher payouts. “We’re back in an environment where fixed income has the potential to do exactly what fixed income was supposed to do. One, have a pretty interesting source of just a pure income component. Two, also act as a negative correlation to other risk assets,” said Jeff Klingelhofer, co-head of investments at Thornburg Investment Management. Klingelhofer did say he was more interested in adding mid-term duration than long-term duration products, however. The flows could also be a sign that investors are taking advantage of tax-loss harvesting opportunities in other fixed income products and shifting into bond ETFs that may have cheaper fees. Allison Bonds, head of private wealth management & independent wealth management at State Street Global Advisors, said that market drawdowns can be catalysts for growth in ETFs. “Every time we’ve seen a pullback in the market, it’s always been this big inflection point of assets moving from mutual funds to ETFs,” Bonds said.
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