The Rise in Interest Rates Sparks Surge in Trading for Long-Term Bond Products
Introduction
The recent surge in interest rates has led to a significant increase in trading for long-term bond products, including those focused on high-quality Treasuries. This trend is reminiscent of the frenzied activity typically seen in equity products, according to Strategas ETF strategist Todd Sohn.
The Long-Term Bond Frenzy
Despite the unexpected inflows, the iShares 20+ Year Treasury Bond ETF (TLT) continues to dominate the market. With $20.1 billion in inflows this year, including nearly $3 billion in the past month, TLT has established itself as a leader in the ETF market. In comparison, the Ark Innovation ETF (ARKK) attracted around $14 billion in the ten months starting from April 2020.
Trading Volume Surge
Not only has TLT experienced remarkable inflows, but its trading volume has also skyrocketed. In October alone, TLT had an average daily trading volume of 52.8 million shares, more than double the year-to-date daily average through September, according to FactSet.
Key Differences and Challenges
While TLT and Cathie Wood’s equity funds both saw significant spikes in activity, there are some notable differences. The popularity of ARKK was driven by momentum trading, while bond funds have struggled over the past year. Rising yields, which move inversely to bond prices, have particularly impacted longer-dated bonds like TLT, resulting in a nearly 14% loss this year on a total return basis.
Reasons Behind the Interest in TLT
Investors’ interest in TLT goes beyond short-term traders and includes long-term investors. Some see the higher yields as an opportunity to secure attractive payouts, while others may be positioning themselves for potential economic slowdowns in the future. Additionally, the flows into TLT may be driven by investors taking advantage of tax-loss harvesting opportunities in other fixed income products and shifting into bond ETFs with lower fees.
Conclusion
The surge in interest rates has sparked a fervor in trading for long-term bond products, with TLT leading the charge. Despite the challenges posed by rising yields, many investors are drawn to the potential income and negative correlation to other risk assets that fixed income provides. The interest in TLT is driven by both short-term traders and long-term investors, signaling a diverse range of strategies and objectives in the market.
