By Brendan Conway
The view of exchange-traded fund buyers these days is that the middle is magnificent. If, by “middle,” we’re referring to the middle of the Treasury curve. Are they right?
The attached chart from Ned Davis Research’s Neil Leeson and Wenbo Zhou shows the flood of money the last two months into iShares 7-10 Year Treasury Bond ETF (IEF), a pretty good proxy for the mid-range. It’s a remarkable shift. The iShares fund is now the single biggest money-gathering bond ETF for the year, XTF.comdata show. In the prior year, investors didn’t show as much interest.
They’ve also spent a pile of money on ProShares Ultra 7-10 Year Treasury ETF (UST), a leveraged bet on the middle of the curve — this one is, just as remarkably, the second-biggest money gathering bond ETF this year, just ahead of Vanguard Total Bond Market ETF (BND).
The big buys used to be the short end of the curve via iShares 1-3 Year Treasury Bond ETF (SHY) and the long through iShares 20+ Year Treasury Bond ETF (TLT). Then, in March, as the long end soared higher, investors decided they were done with the short end. They dumped SHY during that period.
Why the rush to the middle? Leeson and Zhou have a theory:
[A]s the curve has flattened this year, investors have dumped their short-term bond funds and bought into the middle of the curve, where they perceive less risk.
Such elevated buying of funds like IEF suggests that investors see further flattening due to an economy that may be slowing or growing at a slower rate than expected. If the Fed continues to taper their bond buying program, as the economy slows, the middle of the curve may be the best place to be.