US Bond Investors Favor Shorter-Term Debt Amid Rising Interest Rate Risks

US bond ETF investors are shifting towards shorter- and intermediate-maturity debt as interest rate risks rise. This trend is driven by renewed global bond selloffs, rising oil prices, and inflation concerns.

Rising oil prices have revived inflation worries, while government borrowing and heavy demand for capital have pushed longer-term yields higher across major markets. Japan's 10-year government bond yield hit above 3 percent for the first time in three decades this month, while US Treasury yields are near three-year highs and German and British borrowing costs are at multi-year peaks.

Short U.S. Treasury exchange-traded funds drew $12.2 billion in the 20 trading sessions through September 8, while intermediate-maturity bond ETFs attracted about $5.7 billion over the same period, according to LSEG Lipper. This inflows into shorter-term bonds amount to more than a fifth of the $58 billion those funds have attracted so far this year.

Morningstar data showed US intermediate core bond ETFs received $54.2 billion in net inflows through August, while short-term bond ETFs attracted $25.3 billion. Long-term bond ETFs drew just $2.5 billion over the same period. Analysts said the much smaller size of the long-term bond ETF category partly explains the gap in absolute dollar flows.

Bryan Armour, director of ETF and passive strategies research for North America at Morningstar, noted that the yield curve isn't really compensating investors much for taking more interest-rate risk. Short-dated bonds typically offer income with limited sensitivity to further increases in yields, while intermediate debt provides more potential upside if economic growth weakens and borrowing costs fall.

The selloff has sharpened the trade-off between these bond options. Long-duration funds have failed to regain the enthusiasm they enjoyed after the Federal Reserve's aggressive tightening cycle in 2022. Armour said investors had piled into long-term bond funds in anticipation of easier monetary policy and more restrained government spending, but that hasn't come to fruition.