Rates returned to center stage in October as the 10-year U.S. Treasury yield broke above 5%, a threshold not reached in 16 years. In turn, the rise applied pressure on equity markets, extending a broader monthslong sell-off.
ETF volumes remained elevated as investors navigated the downturn.
Flows and performance move in opposite directions as investors add to battered long-dated bonds.
October ETF flows compared with index performance
Source: BlackRock, Bloomberg, chart by iShares Investment Strategy. As of October 31, 2023. Flows normalised by AUM as of of September 30, 2023. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Index performance is measured by the following indexes: EM Equity: MSCI Emerging Markets IMI Index; Gold: ICE LBMA Gold Price Index; U.S. Treasury: ICE BofA 10-Year U.S. Treasury Index; Communication Services: S&P 500 GICS Level 1 Communcation Services Sector Index; Utilities: S&P 500 GICS Level 1 Utilities Sector Index; HY Credit: iBoxx USD High Yield Index; Commodities: S&P GSCI Index; Information Technology: S&P 500 GICS Level 1 Information Technology Sector Index; Consumer Staples: S&P 500 GICS Level 1 Consumer Staples Sector Index; Health Care: S&P 500 GICS Level 1 Health Care Sector Index; Financials: S&P 500 GICS Level 1 Financials Sector Index; Industrials: S&P 500 GICS Level 1 Industrials Sectors Index; Energy: S&P 500 GICS Level 1 Energy Sectors Index. Coloring is based on quadrants: quadrant I: green; quadrant II: yellow; quadrant III: pink; quadrant IV: purple.
Chart description: Scatter plot showing the relationship between index performance and ETF sub-asset class flows for October 2023.
Highly sensitive to interest rates, badly beaten, and posting double-digit negative returns – an unlikely descriptor for one of October’s favored allocations. Despite sharply negative performance, long-dated bonds remain top asset gatherers as traders continue to ‘buy the dip,’ wagering that interest rates may have peaked, and slated to move in the opposite direction.1
Flows historically follow performance – an intertwined relationship that underscored October’s equity allocations. But the reverse played out in bond exposures as investors flocked to long-term U.S. Treasuries, which boast a higher duration – indicating a greater price sensitivity to interest rate shifts – and is poised for upside if yields subside. TLT (iShares 20+ Year Treasury Bond ETF) is one way investors can gain exposure to this contrarian viewpoint, notching a record $20.1bn year-to-date, the third most inflows out of all 3,322 U.S.-listed exchange-traded funds.2 These historic inflows were met with steep losses: long-dated funds have returned -14.01% on the year, and near -5% in October alone as interest rates climbed, not declined.3 Still, the potential reward attracted dip buyers: the aforementioned TLT took in its second largest weekly inflow YTD in the third week of October, complete with two consecutive days of inflows over $1bn each.4
No return, no problem
Source: Bloomberg, chart by iShares Investment Strategy as of October 31, 2023. Flows rebased to 0 as of January 01, 2023. ETF groupings determined by Markit. 10y yields as represented by USGG10YR Index.
Chart description: Line chart comparing the cumulative flows of long-duration ETFs and 10-year Treasury yields year-to-date.
All currencies referenced are USD.
1Source: BlackRock, Bloomberg. As of October 31, 2023.
2Source: Bloomberg. As of October 30, 2023.
3Source: Bloomberg. Returns as represented by ICE U.S. Treasury 20+ Year Bond Index 4PM. As of October 30, 2023. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
4Source: Bloomberg. As of October 30, 2023.
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