The first three quarters of 2023 were challenging for investors in treasury bond ETFs as the US Federal Reserve’s rate hikes impacted returns, although the last quarter offered significant relief. Despite the negative returns through the first three quarters of 2023, treasury bond ETFs had consistently strong inflows throughout the year. This investor interest was across the duration spectrum; longer duration (10+ years) treasury bond ETFs took in $42 billion in net inflows in 2023 compared to $26 billion for ultra-short duration (less than one year) treasury ETFs, despite the former being more sensitive to rate hikes.
This apparent contradiction between weak returns and strong flows in Treasury bond ETFs last year is best highlighted by the iShares 20+ year Treasury Bond ETF (TLT). It took in $17 billion in net flows in the first three quarters of 2023, despite being down 9% year-to-date through that period. The ETF also saw a sharp increase in trading volume last year (Figure 1), becoming the most traded bond ETF in the U.S. in the six-month period ended December 29, 2023.
Additionally, there are certain high volume or high inflow days in TLT that are worth noting. On October 19, 2023, TLT traded 87 million shares. Several weeks later, on November 9, 2023, it traded nearly 89 million shares. On a notional basis, this is $7.3 billion and $7.8 billion, respectively. Neither of these days coincided with FOMC rate decisions or significantly outsized volumes in broader fixed income markets. However, on both October 19 and November 9, TLT options’ open interest was at 5.5 million, its highest amount of the year, confirming the role of options in driving TLT trading volume.
As we start 2024 and the Federal Reserve makes pivotal rate decisions, TLT is a noteworthy instrument to track. Its institutional adoption, 2023 inflows, heightened volumes, sensitivity to interest rates, and robust options market all make it a multifaceted ETF. Additionally, January tends to be a month when investors reassess their portfolio and make changes for the year ahead. We expect TLT to be at the forefront of this activity in this new year.
This commentary is provided for informational purposes only and does not constitute financial, investment, or trading advice. The information is provided "as is" and neither Flow Traders nor its affiliates guarantee the accuracy, sufficiency, or completeness of this content and disclaim liability for any errors or omissions. Any past performance discussed above cannot be used to estimate and/or guarantee future results. Flow Traders is not affiliated with CFRA Research or WealthManagement.com