By Bansari Mayur Kamdar

Investors continued piling into exchange-traded funds (ETFs) that track U.S. government debt in the third quarter, with retail investor flows hitting their highest level since the pandemic on bets that the Federal Reserve is done hiking rates.

Daily retail investor flows into the benchmark iShares 20+ Year Treasury Bond ETF touched their highest level last week since March 2020, according to data from Vanda Research.

The fund saw net retail inflows rise to $1.2 billion so far this quarter, Vanda's data showed, even as prices slid to their lowest level since 2010 amid a sharp rise in yields. The ETF saw retail net inflows of nearly $746 million in the second quarter.

"With rates getting close to their expected peak, many investors are starting to take on more duration knowing that when rates do fall, they will see price appreciation in fixed income," said Noel Archard, AllianceBernstein's Global Head of ETFs and Portfolio Solutions.

Yields on the U.S. benchmark 10-year Treasury note are near 16-year highs on fiscal concerns and renewed hawkishness from the Federal Reserve. Yields move inversely to prices.

The iShares 20+ Year Treasury Bond ETF is down 13.3% in the third quarter and has fallen 10.4% year-to-date.

Overall, the ETF saw nearly $3.9 billion in net inflows so far this quarter, according to Lipper data, slowing from nearly $6 billion last quarter but still on track to post its ninth straight quarter of inflows.

A decline in short positioning on the fund could be further evidence of investors betting that rates are unlikely to go much higher.

"Short sellers are looking for the shape of the yield curve to change in the near term," said Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners.

Over the last thirty days, Dusaniwsky said there has been 4.92 million shares of short covering, worth $436 million, a 13.6% drop in total shares shorted.

(Reporting by Bansari Mayur Kamdar in Bengaluru; Editing by Ira Iosebashvili)