Investors appear to be growing more comfortable with the path for interest rates and are shifting their fixed income bets accordingly. Citi managing director Scott Chronert said in a note to clients on Tuesday that investors using exchange-traded funds moved their bond exposure to longer-dated assets in July. “Money seemed to move out the curve via ETFs last month. … Ultra short and short duration ETFs were redeemed. Long duration had notable inflows,” the note said. Duration measures a bond’s price sensitivity to changes in interest rates. Bonds with longer maturities have greater duration. The data compiled by Citi shows that short-term debt funds saw $5.7 billion in outflows in July, while the ultra-short category shed $300 million. Meanwhile, intermediate-term debt raked in $9.3 billion, and long-term debt welcomed $5.7 billion. The shifting cash could be a signal of where investors think interest rates will move from here. When rates are rising, like they did in 2022 as the Federal Reserve hiked rates aggressively, short-term bonds are more attractive. Yields move opposite of price, and longer-term bonds tend to see a bigger drop in price when the Fed hikes rates. But now that the Fed has slowed its rate hikes, investors could see less risk of price depreciation for longer-term bonds. The list of the most popular bond funds by inflows in recent weeks is dominated by large passive funds. The iShares 20+ Year Treasury Bond ETF (TLT) and Vanguard Intermediate-Term Treasury ETF (VGIT) have both been two of the 10 most popular ETFs of any type over the past month, according to FactSet’s flow data. The iShares 3-7 year Treasury Bond ETF (IEI) and the Vanguard Intermediate-Term Bond ETF (BIV) have also seen sizable inflows recently. Broad bond funds will often have longer duration than short-term funds, even if there is no reference to time frame on the label. For example, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) has an effective duration of about 3.6 years, according to fund’s website, and has seen inflows over the past month. Notably, Citi’s report and FactSet do not reflect any data after Fitch downgraded the U.S. government credit rating late Tuesday. — CNBC’s Michael Bloom contributed reporting.
