USO & BIL ETF Demand Driven By Oil Recovery, Rate Cut Odds

Last week gold and high-yield corporate debt notched some of their most extreme flows since their inception when Federal Reserve officials struck a dovish tone. Alongside the record flows into the GLD and HYG ETFs, the crude oil-tracking USO ETF and the Treasury bill-shadowing BIL ETF saw spurious demand. Meanwhile, the surging likelihood of rate cuts from the Fed has seen traders shy away from US Treasuries with longer maturities.


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USO etf price chart and S&P 500

Data source: Bloomberg

$40 million poured into the USO ETF last week as traders looked to capitalize on a sharp decline in the price of crude oil at the end of May. After plummeting roughly 20% in just three weeks, investors were eager to call the bottom and lunge at the first buying opportunity. Since then, crude prices have seemingly bottomed out around $51.50.


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Data source: Bloomberg

While the crude oil recovery and flows into USO were likely encouraged by a series of fundamental and technical developments, the reasons behind the demand for the 1 to 3-month US T-Bill-tracking BIL ETF were less opaque. Raking in $475 million on Wednesday alone, the fund recorded over $1 billion in fresh capital last week – good for the largest weekly inflow for the year by a comfortable margin.

A dovish Federal Reserve which bolstered the GLD and HYG ETFs similarly boosted BIL as investors looked to capitalize on virtually risk-free return in a timeframe that boasts a higher yield than some longer-term counterparts with the prolonged yield curve inversion. The same forces have seen investors shy away from the TLT ETF which grants exposure to Treasuries with a maturity over 20 years.


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TLT ETF fund flows

Data source: Bloomberg

Unlike BIL, the TLT ETF saw -$445 million leave its coffers last week. Tuesday’s outflow of -$550 million notched the fund’s second-largest intraday outflow in the year-to-date. The divergence in demand for opposite ends of the yield curve further reflects the distorted risk-reward profile of the Treasury landscape. With a week to go before the Federal Reserve’s June meeting, the Fed blackout period has begun which will leave markets thirsting for insight on the Fed’s policy path.

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