By Patturaja Murugaboopathy
Sept 9 (Reuters) – U.S. bond ETF investors are favouring short- and intermediate-maturity debt while demand for long-term funds remains subdued as a renewed global bonds selloff raises interest rate risks.
Such positioning has come into sharper focus as rising oil prices revive inflation concerns, while worries over government borrowing and heavy demand for capital push longer-term yields higher across major markets.
Japan’s 10-year government bond yield hit above 3% for the first time in three decades this month, while U.S. Treasury yields are near three-year highs and German and British borrowing costs are at multi-year peaks.
Short U.S. Treasury exchange-traded funds drew $12.2 billion in the 20 trading sessions through September 8, while intermediate-maturity bond ETFs attracted about $5.7 billion over the same period, according to LSEG Lipper.
The inflows into shorter-term bonds amounted to more than a fifth of the $58 billion those funds have attracted so far this year.
Morningstar data showed U.S. intermediate core bond ETFs received $54.2 billion in net inflows through August, while short-term bond ETFs attracted $25.3 billion. Long-term bond ETFs drew just $2.5 billion over the same period.
The much smaller size of the long-term bond ETF category partly explains the gap in absolute dollar flows but the modest inflows point to subdued demand, analysts said.
“The yield curve isn’t really compensating you much for taking more interest-rate risk,” said Bryan Armour, director of ETF and passive strategies research for North America at Morningstar.
That has made intermediate bonds more attractive across a wider range of potential rate outcomes, he said.
Short-dated bonds typically offer income with limited sensitivity to further increases in yields, while intermediate debt provides more potential upside if economic growth weakens and borrowing costs fall.
“Intermediate bonds offer a more balanced hedge against weaker growth,” Armour said. They can benefit if rates decline but “won’t get burned to the same degree if rates move higher”.
The selloff has sharpened that trade-off. Long-duration funds, meanwhile, have failed to regain the enthusiasm they enjoyed after the Federal Reserve’s aggressive tightening cycle in 2022.
Armour said investors had piled into long-term bond funds in anticipation of easier monetary policy and more restrained government spending, but “that hasn’t come to fruition.”
J.P. Morgan Asset Management has described the broader positioning as a “duration barbell”, with investors avoiding an all-or-nothing bet on the direction of rates and instead spreading exposure across parts of the curve that can perform under different economic outcomes.
(Reporting by Patturaja Murugaboopathy;Editing by Vidya Ranganathan and Alison Williams)
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