CHICAGO – MARCH 28: On March 28, 2006 in Chicago, Illinois, traders in 10-year Treasury options indicated increased offering activity at the Chicago Commodity Exchange Commission after the Federal Open Market Committee announced it would raise short-term interest rates by an additional 0.25 percentage point.
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Investors concerned about the stock market and looking for ways to prepare their portfolios for potential stock market declines typically turn to the U.S. Treasury market as a “flight to safety” allocation. But if you’re following the dual stock and bond market warning issued this week by JPMorgan CEO Jamie Dimon, you’ll want to keep your exposure to Treasuries short.
In fact, this is exactly what many investors have already done over the past year and continued to do in June and July. While investors continue to add record amounts to equity ETFs, with the U.S. ETF market totaling more than $1 trillion in assets as of mid-year, with equity ETFs accounting for nearly half of that total, many investors have made the decision to stay on the short end of the Treasury market.
ETF flow data over the past year shows investors are piling money into short-term Treasuries. iShares 0-3 Months Government Bond ETF (SGOV) has received more money from investors this year than any other bond ETF. According to ETFAction.com, ETFs have increased net investor inflows by $47.5 billion. With nearly $100 billion in assets, it is the third largest bond ETF overall, surpassed by Vanguard Total Bond Market ETF (BND) and iShares Core U.S. Aggregate Bond ETF (AGG).
In addition to trading stocks at values he doesn’t touch, Dimon said in an interview with CNBC contributor Wilfred Frost on Monday that he also doesn’t buy long-term government bonds. “The interest rate on the 10-year bond should probably be 4% to 4.5%,” he said.
Even if inflation begins to recede closer to the Federal Reserve’s 2% target, the CEO of the nation’s largest bank said he doesn’t see much upside in the price of long-term Treasuries.
The 10-year Treasury currently yields 4.6%, but yields have been rising for much of the year as the market shifted from believing the Fed would eventually cut rates to believing it was more likely to raise them. As long as the risk of rate hikes remains and the outlook for inflation remains uncertain, 10-year bond prices should remain under pressure, moving inversely to yields. Broader concerns about public spending and deficit levels are also contributing to yield concerns.
Vanguard Total Bond Market and iShares 0-3 Months Treasury ETF were the only bond ETFs to rank in the top 10 by flow over the past year, according to data from ETFAction. The iShares Treasury Bond Fund ranks fifth overall with nearly $50 billion in net inflows. Only the largest ETFs out there are Vanguard, iShares, State Street’s Core S&P 500 fund, and the Vanguard Total Stock Market ETF.
The momentum in short-term Treasuries has continued throughout the year, with SGOV ranking fifth among all ETFs in June flows.
The idea that short-term Treasuries are good at smoothing out market volatility is not new, most famously championed by Warren Buffett, who wrote in his annual letter to Berkshire Hathaway investors in 2013 that his estate plan for his wife was 90% S&P 500 and 10% Treasuries, which would be sufficient for most long-term investors.
