Rate Hike Speculation Isn't Chasing Investors From Treasury ETFs...Yet

Meeting minutes revealed by the Federal Open Market Committee (FOMC) last week showed that the Federal Reserve could boost interest rates at its June meeting. Bond markets reacted accordingly. On May 17, Fed funds futures priced in just a 12 percent chance of a June rate hike. By May 18, that number surged to 25 percent.

To this point, advisors and investors who enthusiastically poured billions of dollars into fixed-income exchange-traded funds this year have not started departing those funds in significant fashion. In fact, this month, some bond ETFs are keeping up already torrid paces of asset gathering.

HYG's Not So Hot, But There's More To The Story

On a month-to-date basis, the iShares iBoxx $ High Yid Corp Bond (ETF) HYG is the only bond fund among the worst 10 ETFs in terms of lost assets. Outflows from HYG started prior to the release of the most recent FOMC minutes. Conversely, four of this month's top 10 asset-gathering ETFs are bond funds and three of those are either Treasury funds or heavy on U.S. government debt.

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“Despite the fact that investors are now pricing in a 30 percent chance that the Fed will hike interest rates in its June meeting, treasuries yields are still down sharply for the year so far – which goes to show that investors are still to be fully convinced about the Fed’s newly found hawkish stance,” said Markit in a recent note. “This skepticism has been evidenced as US ETF investors have taken advantage of the recent spike in yields to buy into US treasuries. Treasury ETFs, which saw their first inflows since mid-February last week, have continued to see inflows this week with over $330 million flowing into the 52 US treasuries ETFs in the Markit ETP database.”

A Few Others To Watch

With a rate hike potentially just a few weeks away, investors are favoring intermediate-term bond ETFs this month. For example, the Vanguard Intermediate Tm Cpte Bd ETF VCIT and the Vanguard Intermediate-Term Bond ETF BIV have added over $1.1 billion in new assets combined since May 1.

The iShares Barclays Aggregate Bond Fund AGG, which has an effective duration of 5.2 years, is this month's top asset-gathering bond ETF with $753.7 million of inflows. Year-to-date, only two ETFs have taken in more new money than AGG.

Markit notes that prior to the past two weeks, Treasury ETFs suffered 10 consecutive weeks of outflows.