Bond Yield Spike, Bearish Bets Shake U.S. ETFs as Europe Sees Record Inflows

U.S. ETFs Slide as Treasury Yields Rattle Equities

U.S. exchange-traded funds are facing a wave of selling pressure as rising bond yields erode investor confidence in domestic equities. The 10-year Treasury yield climbed to 4.6% after a weak 20-year bond auction, sparking a selloff that dragged the S&P 500 down 1.6% and the Nasdaq Composite down 1.4%, both on higher-than-average trading volumes. Small-cap stocks bore the brunt of the impact, with the Russell 2000 slumping 2.8%, signaling a risk-off sentiment taking hold in the market.

The SPDR S&P 500 ETF Trust (SPY), a bellwether for broad market sentiment, fell 1.66% to close at $582.98. Notably, this drop came with rising volume, suggesting that institutional investors are pulling back from equities in response to mounting concerns about inflation, higher-for-longer interest rates, and fiscal policy uncertainty. Analysts at StockInvest.us have even downgraded SPY to a “sell” candidate due to bearish technical signals.

Adding further pressure, institutional short-selling activity is back on the rise. According to Financial Times, hedge funds are targeting sectors like consumer staples, semiconductors, regional banks, and biotech through ETFs such as the SPDR S&P Regional Banking ETF (KRE) and SPDR S&P Biotech ETF (XBI). Short interest in these funds has surged to levels above their available float, reflecting broad bearish positioning by sophisticated market participants.

Europe Sees Historic ETF Inflows as U.S. Investors Seek Stability

While U.S. ETFs struggle, European equity ETFs are enjoying a record-setting year. According to ETFGI, total assets under management in European ETFs reached $2.47 trillion at the end of April—an all-time high. Net inflows have hit $118.60 billion year-to-date, making it the most robust start to the year in the industry’s history.

The surge in demand reflects a growing global skepticism about U.S. economic stability and a pivot toward perceived safer opportunities in Europe. A recent Reuters report shows that investors allocated €34 billion to European equity ETFs in 2025 through mid-May, far outpacing the €8.2 billion funneled into U.S. equity funds. The reversal of 2024’s fund flow trend underscores how macroeconomic narratives are shaping cross-border investment strategies.

As ETF markets respond to macro volatility, fund managers are increasingly rotating into geographies and sectors that offer yield, stability, or protection against U.S.-centric risks. With bond markets and central banks still commanding investor focus, ETF allocations are likely to remain fluid in the weeks ahead—especially as traders digest U.S. fiscal debates and global growth signals.