There are signs that the bull market's putative Achilles' heel — crisis-era short-term dollar funding costs — might heal soon.
Thank heavy inflows into low-duration funds.
Investors seeking to pare interest-rate risk poured a hefty $1.1 billion into the iShares 1-3 Year Treasury Bond ETF last week, the most since October 2014 and the fourth-largest allocation into U.S.-listed products across asset classes.
The rising demand for short-term debt has been fueled by inflation concerns that contributed to the recent market sell-off, and prompted investors to avoid assets with elevated duration risk such as longer-term bonds.
Any downward pressure on yields at the front end may also benefit stocks — whose appeal increases as the return on safe assets shrinks — while easing borrowing costs for companies.
Passive fixed-income products with short duration took in $1.8 billion in the week ended May 11, some 1.4% of their total assets, according to data compiled by Bloomberg. Flows into government bond funds with limited rate risk are running at one of their hottest five-day paces relative to the past year, according to Deutsche Bank.
"If these flows are sustained, they should help richen the front end, steepen the curve, and drive down front-end spreads," Deutsche strategist Steven Zeng wrote in a recent note. "The cash could also be invested into money markets, putting downward pressure on commercial paper rates and three-month Libor."