A record flood of cash has poured into opposite ends of the US Treasury yield curve this year, seeking either to seize on the highest short-term interest payments in over two decades or profit from a long-bond rally once rates finally peaked.
The divergent bets both appear set to pay off — simultaneously.
With the Federal Reserve signaling it plans to keep rates elevated to snuff out the last sparks of inflation, short-term Treasuries are likely to keep throwing off the high yields that have sheltered investors from the losses that slammed other corners of the bond market this year.
At the same time, that higher-for-longer stance is fueling speculation that the economy will stall, with the slowdown in job growth last month a potential harbinger. If that happens, longer-dated bonds may rally as the market prepares for interest-rate cuts and investors rush back into havens from a recession.
“The current shape of the yield curve definitely makes it compelling to park cash in the front-end, but with people more worried about the potential for a slowdown and the recent bear steepener, the long-end is looking much more enticing,” said Winnie Cisar, global head of strategy at CreditSights Inc.
The rise in interest rates this year drove investors to add nearly $36 billion to exchange-traded funds tracking bonds maturing in one year or sooner, with a record $15.8 billion coming in the third quarter alone, Bloomberg Intelligence data show. Meanwhile, at the other extreme, ETFs holding bonds that mature in 10 years or more have attracted almost $42 billion so far in 2023, leaving them on track for a record annual inflow.
The results have been wildly different: While the SPDR Bloomberg 1-3 Month T-Bill ETF (ticker BIL) — the largest ultra-short bond ETF — earned 4.1% on a total return basis this year, the iShares 20+ Year Treasury Bond ETF (TLT) is sitting on losses of over 9%.
But those long-end wagers are starting to pay off, too. Last week, 10-year yields slid after the Fed held rates steady and payroll growth slowed by more than Wall Street economists expected. That boosted TLT’s price by nearly 4% last week, its biggest gain since January, though bonds on Monday gave back some of the gains.
While long-dated Treasuries are still down for the year, the promise of outsize payouts from the long end has been fueling the inflows, according to Mizuho International Plc’s Peter Chatwell.
“Bills for income and duration for adventure,” Chatwell said. “There is still a strong belief in the market that inflation is transitory and interest rates will revert to the post-Great Financial Crisis average.”
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