Why Short-Term Bond ETFs Could Be Back In Favor

Bond yields have been on an uptrend lately on concerns over increasing inflationary pressure. U.S. 10-Year Treasury yields are hovering around a four-year high. Bond yields and prices move inverse to each other. As a result, a bloodbath and subdued year-to-date returns in the bond market are self-explanatory.

iShares 20+ Year Treasury Bond (NASDAQ:TLT) ETF (V:TLT) is off 5.9% so far this year (as of Mar 6, 2018) while Vanguard Short-Term Bond ETF BSV has lost about 0.4%. But short-term bond funds have still managed to draw investors’ interest. The short-term bond fund BSVhauled in about $827 million (per etf.com) in assets since January 2018 while long-term bond fund TLT has shed about $7.8 million (read: Inside February ETF Asset Report).

Investors should note that money-market or cash-equivalent ETF iShares Short Maturity Bond ETF NEAR has seen outflows of $220.8 million so far this year. NEAR has advanced only 0.2% in the year-to-date frame (as of Mar 6, 2018).

But with theFed widely expected to hike interest rates faster – or more than three times that has so far been penciled by the central bank – this year, treasury yields are likely to log further uptrend (read: Welcome Powell Era With These ETFs).

So far this year (as of Mar 6, 2018), the yield on one-month U.S. Treasury has jumped 27 bps to 1.56%, while yield on six-month U.S. Treasury has jumped 26 bps to 2.06% and two-year bond yields has spiked to 2.25% from 1.92%. This is where short-term bond ETFs are likely to gain on in the coming days, according to BlackRock, as quoted on Financial Times.

Inside the Renewed Interest in Short-Term Bonds

An uptick in yields on short-term US Treasuries is “restoring their appeal”, as the trend is providing investors “with a good alternative to holding cash,” as per BlackRock. The logic behind this theory is that the recent move-up has put the yield above the annual rate of consumer level inflation, which was 2.1% last month. The research house noted that “investors now have a viable alternative to cash with yields finally above inflation levels.”

And even if there is a selloff in short-term bonds or price erosions, considerable yields will likely make up for the capital losses. If we go by the theory presented by Richard Turnill, BlackRock’s global chief investment strategist, currently “a surge of more than 1 percentage point in short-term bond yields” will justify a decline in prices, which is enough to eat away a whole year of income.

Also, increased U.S. borrowings are in the cards to fund the recently passed tax reform and budget bills. This would result in a spike in the one-month to one-year treasury bill issuances. BlackRock estimates net issuance this year will be $500 billion, much higher the levels we have seen in recent times.

ETFs in Focus

Against this backdrop, investors can take a look at the likes of AdvisorShares Newfleet Multi-Sector Income ETF (NS:MINC) (yields 2.56% annually), AdvisorShares Pacific Asset Floating Rate ETF FLRT (yields 3.25% annually) and PowerShares Variable Rate Investment Grade Portfolio VRIG (yields 2.33% annually) (read: Earn 5% Plus Yield With These ETFs).

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