CHICAGO – MARCH 28: Traders in the 10-year Treasury Note options pit at the Chicago Board of Trade signaled more activity following the Federal Open Market Committee’s announcement that it was raising short-term interest rates by another .25 percent on March 28, 2006 in Chicago, Illinois.
Scott Olson | Getty Images News | Getty Images
Investors worried about the stock market and looking for ways to adjust their portfolio for potential inflation often turn to the US stock market as a “safe haven” share. But if you’ve followed the dual stock and bond market warning issued this week by JPMorgan CEO Jamie Dimon, it’s best to keep that wealth exposure short.
In fact, that’s exactly what many investors have already been doing for the past year and are continuing to do in June and July. While investors continue to add record amounts to ETFs — the US ETF market reached more than $1 trillion in assets at the mid-year mark and equity ETFs account for nearly half of that total — many investors have made their own call to stay at the end of the treasury market.
ETF flows data over the past one year show that investors have been piling into short-term treasuries, iShares 0-3 Month Treasury Bond ETF (SGOV) is taking in more money from investors this year than any other bond ETF. ETFs added $47.5 billion in income from investors, according to ETFAction.com. It has become the third largest bond ETF, with approximately $100 billion in assets, second only to ETFs. Vanguard Total Bond Market ETF (BND) and iShares Core US Aggregate Bond ETF (AGG).
In an interview with CNBC contributor Wilfred Frost on Monday, Dimon said that in addition to trading in stocks he won’t touch, he won’t be buying antiques either. “The 10-year bond should probably be at 4% to 4.5%,” he said.
Even if inflation starts to fall closer to the Federal Reserve’s 2% target, the CEO of the nation’s largest bank says he doesn’t see prices rising on long-dated government bonds.
The 10-year Treasury currently yields 4.6%, and the yield has risen more than a year as the market has shifted from the perception that the Fed will eventually cut rates to the idea that a hike may be more likely. As long as the risk of a rate hike remains unclear and the outlook for inflation remains unclear, 10-year Treasury yields, which move toward yields, should remain under pressure. Broader concerns about public spending and deficit levels are also contributing to yield concerns.
Over the past year, the Vanguard Total Bond Market and iShares 0-3 Month Treasury Bond ETF were the only fixed income ETFs to be among the top 10 ETFs by flows, according to ETFAction data. The iShares short-term treasuries fund is No. 5 overall, with assets of nearly $50 billion. That’s surpassed only by the largest ETFs—Vanguard, iShares and State Street core S&P 500 funds, and the Vanguard Total Stock Market ETF.
Short-term wealth momentum continued throughout the year, with SGOV ranking No. 5 among all moving ETFs for the month of June.
The idea that short-term wealth is the place to be to offset market volatility is not new, and it was widely supported by Warren Buffett, who wrote in his 2013 annual letter to Berkshire Hathaway investors that his wife’s inheritance plan was 90% S&P 500 and 10% short-term wealth, and that was good enough for most long-term investors.
