Bond ETFs, Here we Go Again

We have long held that no self respecting fixed income practitioner would ever use the term TLT in a discussion about "bonds." The popularity of a wide variety of bond ETFs continues to rise and the latest numbers fly in the face of the Great Rotation story. According to the Wall Street Journal, bond ETFs took in a record amount of money this month. Flows were wide and varied across product lines with Em concepts grabbing a big chunk. The 2 to 6 year products increased modestly despite Taper. The leveraged 2x Pro Shares Ultra 7-10 year jumped by a factor of 200 from 13.2 million to 2.9 Billion, according to the WSJ and Trimtabs.

This flow is a head turner on its own but in a context of 2014 bond avoidance playbooks and record CFTC speculative short interest in the complex (Treasuries and Eurodollars), the surge is stunning. The buying is difficult to square with equity highs and Fed forward guided prognostications.  This smells like the most fickle of FI money. These "bonds" are Capital Appreciation Notes that can be flipped and exited quickly, as we see it.

Last Spring, reduced capacity, duration extension and negative convexity combined to morph a long awaited bond fall into a mess (a "vortex" long before the Polar kind). We continue to think the ETF universe will complicate and rattle the underlying fixed income world soon.

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