Short-duration bond ETFs are seeing a sudden reversal with capital flows moving out of defensive positions and flowing back into risky assets. Global short-term bond funds saw outflows of $7.08 billion last week through April 15, reversing the previous week’s $7.5 billion in inflows, according to data from LSEG Lipper, cited by Reuters.

This is part of the overall flow reversal away from cash-like products, with money market funds witnessing an unusually large outflow of $173.24 billion, their largest since at least 2018. The shift reflects investors’ unwillingness to earn carry on low-duration securities and an allocation towards equities and credit as risk appetites rise.

Rotation Out Of ‘Cash Proxies’

With short-dated bond ETFs having been favored as parking instruments, they had enjoyed steady inflows in the prior weeks as investors preferred yields without the associated risks. Products like iShares 0-3 Month Treasury Bond ETF (NYSE:SGOV), SPDR Bloomberg 1-3 Month T-Bill ETF (NYSE:BIL), and iShares Short Treasury Bond ETF (NYSE:SHV) were some choices.

That trade is now reversing. The latest weekly data shows outflows across the short end of the curve, indicating that these ETFs are increasingly being used as a source of funds rather than a destination. The unwind comes as easing oil prices and optimism around a potential de-escalation in the Middle East reduce the need for defensive positioning.

Flows Move Up The Risk Spectrum

The capital exiting short-duration products appears to be moving to more aggressive parts of the market. The global equity funds saw inflows amounting to $31.26 billion, marking their biggest weekly flow in three weeks, with high-yield bond funds drawing in $3.64 billion.

Credit ETFs including iShares iBoxx $ High Yield Corporate Bond ETF (NYSE:HYG) and SPDR Bloomberg High Yield Bond ETF (NYSE:JNK) will most likely be the beneficiaries of such flows, giving a higher level of income along with increased risk.

However, inflows to government bond funds were much smaller, at only $827 million, which again indicates that no significant flight-to-quality was taking place.

A combination of negative flows in both money market and short term bond ETFs signals an unmistakable shift in investor sentiment. This crowded trade of waiting for better days has clearly started to unwind due to improved confidence.

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