Investors flock to safety of US short-term government bond funds

Zawya

21-04-2025

U.S. short-term government bond funds have received large inflows this month even as most other funds across asset classes suffered heavy selling in markets hit by worries over U.S. tariffs and recession risks.
Treasury yields have risen this month, as the bonds sold off, as hedge funds unwound their leveraged positions in basis trades and overseas investors sold them in apparent retaliation for tariffs and owing to doubts over the safe-haven quality of U.S. assets.
However, short-term bonds have rallied after the initial selloff, which analysts said showed they offer more safety and liquidity and tend to lose less value in response to changes in yields.
According to LSEG Lipper, U.S. short-term government bond funds received inflows of $18.1 billion so far this month. If the flows are sustained, April could see them get the highest inflows in two-and-a-half years.
In comparison, U.S. bond market funds overall saw outflows of $47.7 billion this month.
The Vanguard Long-Term Treasury Index Fund, which includes bonds with maturies greater than 10 years, has fallen 3.45% this month. In contrast, the Vanguard Short-Term Treasury Index fund, which invests in bonds with maturities lesser than 3 years, has risen 0.03%.
Steven Roge, chief investment officer at financial advisory firm R.W. Rogé & Company Inc, said the higher inflows into U.S. government short-term bond funds are coming from retail investors and wealth managers, prioritizing income and capital preservation.
"When short-term yields are nipping at the heels of long-term ones, many investors are thinking, 'Why take on extra duration risk for maybe just a tiny bit more yield?'".
With uncertainty over tariffs and Federal Reserve rate cuts lingering, analysts expect higher bond volatility to divert fund flows out of riskier segments such as high-yield bonds and private credit into short-term government bond funds.
"Every time new news comes out that increases the chance for large U.S. or foreign tariffs to be a reality, the risk of recession increases and we should expect more flight into the relative safety of short-term government bonds," said Brian Huckstep, chief investment officer at Advyzon Investment Management.
And, when market stability returns, being invested in short-term bonds will enable investors to quickly shift money into riskier assets to capture the rally, analysts said.
Leading the inflows this month among short-term government bond funds were the SPDR Bloomberg 1-3 Month T-Bill ETF, the iShares 0-3 Month Treasury Bond ETF, and the iShares Short Treasury Bond ETF, which attracted inflows of $7.9 billion, $4.2 billion, and $2.8 billion, respectively.
(Reporting by Patturaja Murugaboopathy and Gaurav Dogra in Bengaluru Editing by Vidya Ranganathan)