This major bond ETF is getting 'hammered' as investors brace for rate-cut delays

By Christine Idzelis

'Rates have simply been flying lately'

Hello! This week's ETF Wrap digs into the selloff in bonds as yields jump. Should investors wade into the bond market for buying opportunities?

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In the bruised bond market, some investors may be tempted by higher yields as questions swirl around when - and whether - the Federal Reserve may start cutting interest rates this year.

Interest rates in the bond market have risen "pretty dramatically" lately, said Sam Martinez, Vanguard's head of indexed fixed-income product business, in a phone interview. Moves higher in bond yields are "a reflection of the fact that inflation has been stickier than expected."

Popular bond ETFs have been hurt by the market moves, as traders pushed out bets for when the Fed may become confident enough that inflation is easing durably toward its target to start cutting rates. Climbing interest rates hurt bond prices, which fall when yields go up.

"Rates have simply been flying lately," Bespoke Investment Group said in a note Wednesday. As a result, the iShares Core U.S. Aggregate Bond ETF AGG has "gotten hammered."

Shares of the ETF have fallen this year, dragging the fund down to a total loss of 2.9% this year through Wednesday, according to FactSet data. "This proxy for the broad bond market has been trending lower throughout 2024," said Bespoke, a research and money-management firm.

"It wasn't necessarily all bad as it was trading above" its 50-day moving average as recently as late March, the firm said. But then, "April declines have seen the ETF fall sharply back below that moving average" and the longer-term 200-day moving average, Bespoke's note shows.

The fund's "rapid decline in the past couple of weeks means the ETF is now at 'extreme' oversold levels as it closed over three standard deviations" below its 50-day moving average on April 16, according to Bespoke. The firm's note shows that "such extreme oversold readings are fairly uncommon."

The market's selloff has left bond yields at "really attractive levels," particularly "if inflation ends up being relatively well behaved over the long run," said Vanguard's Martinez. There's a difference between inflation between "sticky" versus "really high," he said, as it remains well below its 2022 peak but not yet down to the Fed's 2% target. And to his thinking, "we've seen a Fed whose willingness to try and get inflation back to target seems to be intact."

The Vanguard Total Bond Market ETF BND has seen $541 million of inflows in the past month through Wednesday, according to FactSet data. The iShares Core U.S. Aggregate Bond ETF has attracted $3.6 billion over the same period.

Read: June Fed rate-hike risk looms as U.S. labor market stays strong

While bond ETFs with ultrashort durations have fared relatively well in the fixed-income market's recent volatility, slumping debt with longer durations may be tempting some investors.

"If you are already shorter duration than you otherwise should be, depending on the composition of your portfolio and your investment time horizon, it's not necessarily a bad time to wade into the market," said Martinez.

Investors added $346 million to the Vanguard Long-Term Treasury ETF VGLT over the past month through Wednesday, according to FactSet data.

Meanwhile, the yield on the 10-year Treasury note rose 6.2 basis points Thursday to 4.646%, according to Dow Jones Market Data. The 10-year rate has climbed this month to its highest levels since November.

Rates are elevated compared with low levels seen after the global financial crisis of 2008, but they're not all that high from a longer historical perspective, said Jason Bloom, head of fixed income and alternatives ETF strategy at Invesco, in a phone interview.

Some "people piled into duration way too early" in the Fed's ongoing battle with inflation, said Bloom. "I think long-term yields can go higher."

He said that he favors the two-year to five-year part of the Treasury market's yield curve, as well as some areas of the high-yield debt and loan markets from a tactical standpoint.

For example, he cited the Invesco BulletShares 2027 High Yield Corporate Bond ETF BSJR and Invesco BulletShares 2026 High Yield Corporate Bond ETF BSJQ, as well as the Invesco AAA CLO Floating Rate Note ETF ICLO. Yields on the AAA-rate tranche of collateralized loan obligations, or CLOs, have "popped up" to around 7%, said Bloom.

For investors seeking exposure to municipal bonds, he pointed to the Invesco BulletShares 2027 Municipal Bond ETF BSMR and Invesco BulletShares 2028 Municipal Bond ETF BSMS as possibilities.

While stocks, bonds and bitcoin have broadly struggled this month, gold has shined.

SPDR Gold Shares GLD, an ETF that tracks gold prices, has climbed around 7% so far in April, according to FactSet data based on Thursday afternoon trading levels.

The SPDR S&P 500 Trust ETF SPY has dropped 4.5% this month over the same period, while the iShares Core U.S. Aggregate Bond ETF and Vanguard Total Bond Market ETF each have fallen more than 2% in April on a total return basis, FactSet data show, at last check.

The Vanguard Long-Term Treasury ETF has suffered bigger losses as rates climbed, down more than 5% this month on a total return basis based on Thursday afternoon trading levels.

Read: Gold may benefit from 'powerful tailwind' when Fed pivots to rate cuts

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good...

   Top performers                                                                                                                                                                         %Performance 
   SPDR DoubleLine Total Return Tactical ETF                                                                                                                                              1.9 
   Xtrackers Harvest CSI 300 China A-Shares ETF                                                                                                                                           1.7 
   Invesco DB Agriculture Fund                                                                                                                                                            0.8 
   VanEck High Yield Muni ETF                                                                                                                                                             0.6 
   Invesco National AMT-Free Municipal Bond ETF                                                                                                                                           0.6 
   Source: FactSet data through Wednesday, April 17. Start date April 11. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater. 

...and the bad

   Bottom performers                   %Performance 
   Fidelity Wise Origin Bitcoin Fund   -13.6 
   Grayscale Bitcoin Trust             -13.5 
   iShares Bitcoin Trust               -13.5 
   VanEck Bitcoin Trust                -13.5 
   Bitwise Bitcoin ETF Trust           -13.5 
   Source: FactSet data 

New ETFs

Simplify Asset Management said April 16 that it launched the Simplify NEXT Intangible Core Index ETF NXTI and the Simplify NEXT Intangible Value Index NXTV, which aim to provide exposure to U.S. stocks "through the lens of 'intangible capital' rather than the traditional valuation approaches which rely only on tangible assets."

Weekly ETF reads

ETFs that buy bank stocks are under pressure, lagging U.S. equities market (MarketWatch)Cathie Wood takes her Ark ETFs to Europe as US investors jump ship (Financial Times)Hong Kong regulators approve launch of spot bitcoin and ether ETFs (CNBC)Exclusive: ETF Provider Global X Sees More Executive Departures (WSJ)

-Christine Idzelis

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04-18-24 1650ET

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