Short Bets in $14 Billion Treasury ETF Say Yield Calm Will Break

(Bloomberg) - With government bond yields near their pre-pandemic highs, investors are betting that the calm will be short-lived.
The brief USD 14 billion interest in the exchange-traded iShares 20+ Year Treasury Bond Fund (ticker TLT) is, according to IHS Markit Ltd. up to around a fifth of stocks issued, its highest level since early 2017. Bearish bets are up from 7% at the start of 2021, while the fund has declined 13% since the start of the year.
While the bond sell-off that TLT hammered seems to have flattened out, with 30-year returns hovering at 2.4% for almost a month, the surge in short bets suggests that investors aren't expecting that the calm lasts for a long time. Although yields have already moved “significantly” after the market aggressively reevaluated better growth prospects, turmoil should return as economic data releases over the next several months, according to Principal Global Investors.
"This period of calm is likely to be short-lived," said Seema Shah, the company's chief strategist. "We assume that investors will repeatedly grapple with the environment of higher inflation and growth by 2021. Any strong economic and inflation data situation will again unsettle investors and increase volatility."
Investors have pulled nearly $ 2.6 billion from TLT so far in 2021, setting the fund on track for its worst year of outflows since its inception in 2002. Improved growth forecasts and rising inflation expectations have weighed on long-term funds such as TLT and $ 40 billion in iShares iBoxx $ investment grade corporate bond ETF (ticker LQD), which saw its largest one-day outflow last week.
The ICE BofA MOVE index, a measure of US bond volatility, has fallen from a high of 76 at the end of February, its highest level in eleven months, to around 62. While the bond market is in a "hold pattern" after positioning for much more robust economic growth, the next catalyst will be whether or not the data ultimately delivers, according to Richard Bernstein Advisors LLC.
"Treasuries have largely priced in the current Covid incentive, pledge for infrastructure and economic recovery," said Michael Contopoulos, director of fixed income and portfolio manager for the company. “The next leg will be determined by hard data - the actual rise in inflation is more than just a promise of better days. Over the course of the year and into 2022, we should expect more volatility and a tendency towards higher interest rates. "
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