Retail Investors Turn to Bond ETFs in Third Quarter Amid Price Drop

By Bansari Mayur Kamdar

Investors have increasingly turned to exchange-traded funds (ETFs) that monitor U.S. government debt during the third quarter, with retail investor activity reaching the highest level since the onset of the pandemic. This surge in investments is driven by expectations that the Federal Reserve has halted its interest rate hikes.

Daily retail inflows into the benchmark iShares 20+ Year Treasury Bond ETF recently peaked at levels not seen since March 2020, as reported by Vanda Research. So far this quarter, the fund has experienced net retail inflows of $1.2 billion, despite a decline in prices that have reached their lowest point since 2010 due to a significant increase in yields. In comparison, the ETF recorded retail net inflows of nearly $746 million in the second quarter.

“With rates nearing their anticipated peak, many investors are beginning to extend their duration, anticipating that they will benefit from price appreciation in fixed income when rates eventually fall,” commented Noel Archard, Global Head of ETFs and Portfolio Solutions at AllianceBernstein.

Yields on the U.S. benchmark 10-year Treasury note are currently near 16-year highs, driven by fiscal concerns and a more hawkish stance from the Federal Reserve, with yields moving inversely to prices.

For the third quarter, the iShares 20+ Year Treasury Bond ETF has declined by 13.3% and is down 10.4% year-to-date. Overall, the ETF has recorded nearly $3.9 billion in net inflows this quarter, according to Lipper data. While this is a reduction from nearly $6 billion last quarter, it still positions the fund for its ninth consecutive quarter of inflows.

A decrease in short positions on the fund may further indicate that investors believe rates are unlikely to increase significantly. Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, noted that “short sellers are anticipating changes in the yield curve in the near term.” Over the past thirty days, there has been 4.92 million shares in short covering, amounting to $436 million, reflecting a 13.6% drop in total shares shorted.