Tuesday's Bond Selloff Came With Massive ETF Redemptions

By Chris Dieterich and Carolyn Cui 

Tuesday's selloff in the bond market coincided with massive withdrawals from U.S. fixed-income exchange-traded funds.

Some $6.2 billion poured out of bond ETFs on Tuesday, equal to roughly 2.5% of the $240 billion bond ETF market, according to research and analysis firm ETF.com.

In contrast, some $1.9 billion flowed into U.S. stock funds Tuesday, representing 0.2% of total assets.

The shift came as investors reacted to cooling tensions over the Ukraine crisis, reversing flight-to-safety buying in investments such as U.S. Treasurys and gold.

The massive redemptions, mostly from funds holding U.S. government debt, exerted some selling pressure in the $11.8 trillion Treasury market in Tuesday afternoon trading, traders said.

Prices for the benchmark 10-year Treasury notes took a nose dive, driving the yield up 8.4 basis points--the biggest one-day yield increase in more than three months. The 10-year note finished the day at a yield of 2.69%.

Investors often watch short-term ETF money flows for signs of shifting conviction, though some traders said Tuesday's ETF moves may have been more of an example of how one particularly large player can dominate the money trail.

Multiple traders said Tuesday's exodus from bond ETFs was tied to the monthly rebalance of Good Harbor Financial, which appeared to be in the market selling bond ETFs and buying stock ETFs.

Paul Ingersoll, Chicago-based Good Harbor's chief executive officer, didn't return requests for comment.

As reported last month in The Wall Street Journal, Good Harbor's main U.S. strategy can shift from 100% bonds into 100% stocks in one day. Good Harbor usually trades on the first day of each month, but in March it appears to have been in the market on the month's second day.

Good Harbor has a history of trading both the iShares 1-3 Year Treasury Bond ETF and the iShares 3-7 Year Treasury Bond ETF and confirmed last month that it had moved all of its roughly $11 billion under advisement into bond ETFs.

On Tuesday, traders and market evidence suggest that Good Harbor was selling its bondholdings for shares of stock ETFs tied to the S&P 500 and the Russell 2000.

Most of Tuesday's one-day bond ETF flows were concentrated in the iShares 1-3 Year Treasury Bond ETF and the iShares 3-7 Year Treasury Bond, which each had withdrawals of more than $3 billion.

Tuesday was the largest single-day outflow ever for BlackRock Inc.'s iShare's fixed-income ETFs, a spokeswoman said.

Tuesday's outflow from bond ETFs marked a quick reversal of the record inflows the sector had in February. According to Credit Suisse, U.S. bond ETFs had a net inflow of nearly $17 billion last month, an all-time high.

The one-day $6.2 billion exodus compares to net inflows of $14.6 billion into bond ETFs over the past 12 months.

Write to Chris Dieterich at [e-mail] and Carolyn Cui at [e-mail]