In A Massive Shift To Bonds, ETF Traders Dump Risk Assets En Masse

Traders in the hyper-liquid world of exchange-traded funds, in the grips of the worst day for stocks in two months, have ditched equities and corporate bonds in search of the safety of government debt in the face of rising yields. 

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Money managers pulled billions of dollars from major exchange-traded funds that track stocks and credit on Tuesday as hot economic data spurred fresh fears that the Federal Reserve will have to tighten up its tightening program even faster. In the largest withdrawal since 2020, the SPDR Bloomberg High Yield Bond ETF (JNK) saw a $1 billion outflow overnight, according to overnight data compiled by Trade Algo, which was the largest withdrawal since 2020 for the $7.6 billion fund. 

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In addition, the SPDR Portfolio Short Term Treasury ETF (SPTS) gained $908 million, the biggest addition in three years. Almost $2 billion was poured into funds that track short-dated US government bonds in the past year, and this was a slice of that huge sum. Also, money managers poured more cash into a long-term debt strategy that may be beneficial in the event of a recession, with the iShares 20+ Year Treasury Bond ETF (TLT) reaping the most cash in a month since its inception. 

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There was a marked shift in Treasuries yields this week as growing confidence grew that the Fed will not be able to wrap up its war against inflation in the foreseeable future, let alone pivot away from rate hikes in the near future. The increased yields on government debt create a double incentive for investors to turn to it: to take advantage of the rising yields while limiting the potential damage that can come from more economically exposed assets, which may suffer as higher rates hamper economic growth. 

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In the world of ETFs, a single day's data can be a fickle sign, but the flow of funds in the past week underscores the vulnerability of investor sentiment surrounding a new-year rally that saw the S&P 500 at one point rise more than 9% despite most Wall Street expectations that it would decline. As the Dow Jones industrial average fell over 2% on Tuesday, over 90% of the stocks in the benchmark index fell as well. 

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