Inverted U.S. yields lure investors into short-term bonds
By Patturaja Murugaboopathy
(Reuters) — Short-term U.S. government bonds have attracted bigger investment flows this year than longer-term paper, an unusual pattern engendered by the inverted yield curve and the Federal Reserve's intent to keep interest rates higher for longer.
The Fed's aggressive rate hikes and hawkishness have kept short-end yields elevated for most of 2023. One-year Treasury note yields are about a percentage point higher than those on 10-year bonds.
That has meant global investors can avoid the relatively less liquid, longer-tenure bonds just for the sake of extra yield and premium.
According to Morningstar data, inflows into short and medium-term U.S. Treasury bond funds, which invest in maturity periods of 1 year to 6 years, stood at $29.3 billion in the first eight months of this year, a 70.3% rise over last year.
On the other hand, inflows into Treasury funds that invest in bonds with maturities longer than six years dropped to $36.9 billion, an 11.5% decline from last year.
«The absolute yield on short-term Treasuries is extremely attractive. Currently, 2-year Treasuries are yielding over 5%, a level that has not been present in almost 20 years,» said Adam Coons, portfolio manager at Winthrop Capital Management.
«Additionally, the 2-year note is out-yielding the S&P 500 by over 3.5%, which is also the highest difference in 20 years.»
At its latest policy review, the Federal Reserve reinforced the hawkishness and, besides keeping the door open to more rate rises, it has kept rate projections through 2024 significantly higher than previously expected.
LSEG Lipper data shows U.S. short-term bond funds have outperformed this year, delivering a gain of 2.2% in price terms compared with an average
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