The Lipper General classification of US Treasury funds includes funds that invest primarily in US Treasury bills, notes and bonds. Funds in this classification had an average duration of 12.2 years as of December 2021.
Compared to other major bond indices such as the Bloomberg Municipal Bond Total Return Index (-8.8%) and the Bloomberg US Aggregate Bond Total Return Index (-9.5%), US Treasury funds Lipper General posted a very disappointing year since the beginning of the year. negative performance until the end of April of 13.3%.
Despite the poor comparative performance, the classification led the way last week in fund flows, attracting $3.0 billion. Lipper General U.S. Treasury funds have also been hot year-to-date, attracting $21.4 billion, making them the third most popular Lipper classification during this period – behind only income funds. Lipper International (+$33.4 billion) and Lipper Loan Participation Funds. (+25.2 billion dollars). U.S. Treasury funds Lipper General also set a record for quarterly inflows during the fourth quarter of 2021, as it reported inflows of $13.9 billion.
On Wednesday, May 4, Federal Reserve policymakers moved to raise rates by 50 basis points (bps) for the first time in over 20 years. While the significant hike was widely expected, Federal Reserve Chairman Jerome Powell noted that bigger moves were not in the Fed’s future plans. It is still expected, however, that the Fed will raise rates at each of its remaining meetings this year.
With the poor performance of longer dated Treasuries already realized through April, growing inflationary fears and the current environment of rising rates in place, the question arises: why longer dated U.S. Treasuries attracted so much capital this week and this year?
To get the answer, we may need to take a step back. Year-to-date through April, equity markets have posted even worse returns than the Lipper US General Treasury Funds – Nasdaq (-21.2%), Russell 2000 (-17.0%) and S&P 500 (-13.3%).
The only broad US stock index to outperform the rankings was the DJIA (-9.25%). As interest rates rise, already expensive high-flying growth and tech stocks will take a beating. Capital protection, tax exemptions and guaranteed rates of return become even more important as the economy seems to be heading for a period of turbulence.
Risk mitigation and diversification are two terms that seem to have become less sexy during the last bull market. Last month, Goldman Sachs’ economics team predicted there was now a 35% chance of a recession in the United States within the next two years.
Deutsche Bank, which initially released its base scenario for the recession at the end of 2023, said a slowdown by the end of the year is likely if the Fed continues its aggressive monetary tightening. In order to avoid large drawdowns in a larger portfolio, an allocation to treasury bills acts as an option to diversify risk.
A third viable benefit of this Lipper classification in the given environment is the fact that market participants might believe that current prices already price in future rate hike expectations. If this is the case and yields rise less than expected, the case for holding longer-dated bonds is strong – a position many foreign investors are betting on.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.