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May 11, 2018

Investors Finding Solace in Treasury Funds?

by Tom Roseen.

With Treasury yields shifting upward along all maturities, one might expect investors’ appetite for Treasury funds to be declining. After all, Treasury bond values are inversely related to changes in yield. Rising interest rates mean falling bond prices, while falling interest rates mean rising bond prices.

However, Treasuries also function as a safe-haven play, and with the mounting geopolitical uncertainties and the U.S. equity and bond bull markets looking a little long in the tooth, investors are still padding the coffers of select fixed income fund classifications. Year to date through the Thomson Reuters Lipper fund-flows week ended May 9, 2018, Treasury funds have attracted a net $22.4 billion, on pace to beat 2017’s full-year total of $37.0 billion (the largest one-year net inflows on record for Treasury funds), if the same purchasing pattern continues through year-end.

As a result of the recent climb of the ten-year Treasury yield to 3.03% (a closing high not seen since December 31, 2013), half of those net inflows can be attributed to the Short U.S. Treasury Funds classification (+$11.2 billion), with the remaining amounts going into General U.S. Treasury Funds (+$5.7 billion) and Inflation-Protected Bond Funds (+$5.4 billion). So, despite General U.S. Treasury Funds (-3.64%, the worst performing classification year to date in the fixed income funds universe), Inflation Protected Bond Funds (-0.67%), and Short U.S. Treasury Funds (-0.06%) being in negative territory for the year to date, investors continue to find solace in Treasury bond classifications.

For this past fund-flows week Lipper’s Short U.S. Treasury Funds classification attracted the top draw of all the taxable bond fund classifications, taking in $1.3 billion, while Ultra-Short Obligation Funds (+$892 million) took in the next largest net inflows of the taxable bond universe. On the flip side General U.S. Treasury Funds saw the largest net outflows for the week (-$820 million), bettered by High Yield Funds (-$755 million).

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