SUPERNEWS

Macro

Treasury ETF's $2B Exodus Amid Rate Hike Fears

TLT ETF faces record 8-day losing streak and $2 billion outflows amid rising Treasury yields and central bank policy shifts.

By Max Weldon

ᐧ

3/19, 00:13 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Goldman Sachs Group, Inc.
article-main-img

Key Takeaway

  • iShares 20+ Year Treasury Bond ETF (TLT) faces an unprecedented 8-day losing streak and $2 billion in outflows amid economic growth.
  • Shifts in central bank policies, including the Fed's monetary projections and BOJ's expected policy changes, pressure bond yields higher.
  • Persistent outflows from TLT mark a significant change in investor behavior, diverging from previous trends of buying the dip.

Treasury ETF Sees Record Outflows

The iShares 20+ Year Treasury Bond ETF (ticker TLT) has experienced its longest losing streak since its inception in 2002, with eight consecutive declines. This period has also seen significant outflows, totaling $2 billion over five weeks. This shift marks a stark reversal from the previous year's trend, where investors poured billions into TLT, anticipating high returns from the then-beaten-up asset class. The current retreat in Treasury investments is attributed to solid economic growth, which pressures bond yields and reduces the demand for safe assets like long-maturity bonds.

Central Bank Decisions Stir Market Sentiment

Investors are bracing for potential changes in monetary policy from two major central banks: the Federal Reserve and the Bank of Japan. The anticipation of enduring inflation pressures has led to expectations that these banks may adjust their outlooks for interest-rate cuts. Specifically, the Bank of Japan is expected to move away from its negative interest rate policy, which could influence global yields, including those in the U.S. Dave Lutz, head of ETFs at JonesTrading, highlighted that economic data pointing to a hotter economy and stickier inflation is causing a shift towards a "higher for longer" interest rate environment.

Goldman Sachs Adjusts Interest-Rate Cut Projections

Goldman Sachs Group Inc. economists have revised their projections for Federal Reserve monetary policy, now forecasting fewer interest-rate cuts this year. This adjustment reflects a slightly higher inflation path than previously anticipated. Swap contracts now price in 70 basis points of rate reductions for 2024, a significant decrease from the 160 basis points expected in December. This change in outlook has contributed to the climbing Treasury yields, with the 10-year rates reaching their highest level since November.

Street Views

  • Dave Lutz, JonesTrading (Neutral on Treasury Bonds):

    "People are bracing for ‘higher for longer’. Economic data continues to point to a hotter economy and stickier inflation. With BOJ set to end negative rates, it could send their yields higher and drag the US yields in sympathy."

  • Eric Balchunas, Bloomberg Intelligence (Bearish on TLT ETF):

    "To me this was like $40 billion of money that went in tactically betting that the Fed would break something and then hanging on hoping the Fed would cut rates, and neither happened... Some people started bailing and we could see a lot more."