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Bonds are starting to provide serious competition for the stock market. I returned recently from the Exchange ETF conference in Miami Beach and was struck by how confused the registered investment advisors seemed to be on what was going on in the markets. One particular point of confusion was the bond market. In 2021, participants at the same conference confidently declared the traditional 60/40 stock/bond portfolio dead. This year, with yields on the 2-year Treasury over 4.5% at the time of the conference, there were plenty of discussions in the hallways about the appropriate role of bonds in a portfolio. Several RIAs told me they had clients wondering why they shouldn’t just put all their money in a 2-year Treasury and stop worrying about the stock market. ‘Tells’ tell the story I have had the same experience with my own family. My mother, who pays close attention to yields on bank CDs, called to say how amazed she was that she was finally being offered a reasonable return (4%!) for one-year CDs. She inquired about buying Treasury bonds directly, which she has never once inquired about in the past. On Saturday, at a dinner with my family, my brother-in-law took me aside to ask why he shouldn’t just put all his savings into Treasury bonds and forget about the stock market. I have been covering markets for 33 years, and one of the things you learn to pay attention to is stories like these. When your family starts asking you about stuff they never did in the past, that is a tell. Asking about putting all your money into bonds and chucking the stock market is like the shoeshine boy talking about stock market tips at the top of the stock market. It’s a tell, and it tells me that bond yields are a topic in the general population and the bond market is now becoming serious competition for the dollars that were in the stock market. Individuals can of course buy Treasury bonds directly from the U.S. government through TreasuryDirect. But here’s something interesting: We are starting to see significant inflows into short-maturity Treasury exchange-traded funds. Short-term funds popular Vanguard Short-Term Treasury Index ETF, which tracks a market-weighted index of fixed income Treasury securities with maturities of 1-3 years, has seen significant inflows in the last few months and now has $19 billion in assets under management. Similar products, such as the Schwab Short-Term U.S. Treasury ETF and the SPDR Portfolio Short Term Treasury ETF, also have seen significant inflows in recent months. Other short-maturity products that were launched last year, such as the BondBloxx Six Month Target Duration US Treasury ETF and the BondBloxx One Year Target Duration US Treasury ETF, have also seen significant inflows. Alex Morris, president and CIO of F/m Investments, launched the US Treasury 3 Month Bill ETF, the US Treasury 2 Year ETF, and the US Treasury 1 Year ETF late last year. All have seen inflows. Morris’ ETFs hold “on the run” Treasuries. The US Treasury 2 Year ETF (UTWO), for example, is a single-bond fund that invests in the most recently issued, “on-the-run” 2-year U.S. Treasury note. At each monthly rebalancing, the underlying issue is sold and rolled into a newly selected issue. One interesting point: the inflows all seem focused on shorter-maturity Treasury bills and notes (3 years and below). The excitement does not seem to be extending to bonds with longer maturities, such as 10-year Treasuries, nor does the excitement seem to extending into corporate bonds. At least not yet. Why do we need an ETF to buy Treasurys? We can buy Treasurys online directly through the U.S. government. What does an ETF structure get us? “ETFs for Treasurys are preferred by many, basically all because they trade like a stock,” Morris told me. “Without tickers, it is hard to know which bond you want and are buying,” he said. “What you want to buy is yield, but bonds are not traded in yield, they are traded in price which is a tough conversion. Even knowing what you are going to pay is confusing. Our ETFs trade like stocks, track the bonds closely, are evergreen, and pay a regular, monthly dividend. ” Alex Morris, president and CIO of F/m Investments, will be on Halftime Report at 12:35 p.m. ET on Monday, and also on ETF Edge streaming live at 1:05 p.m. on ETFEdge.cnbc.com. He’ll be joined on ETF Edge with Dave Nadig, financial futurist at VettaFi .
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