Investors are piling into the investment-grade market at a record rate due to higher yields and concerns over riskier debt. A total of $19 billion has been poured into funds that buy investment-grade corporate debt since the start of 2023. That marks the most ever at this point in the year, according to data from fund flow tracker EPFR. The money pouring into the asset class underscores an eagerness among investors to buy historically high yields provided by safer corporate debt after years of investing in riskier debt in search of returns. According to Matt Mish, head of credit strategy at UBS, “People basically think that fixed income, in general, looks a lot more attractive than it has in prior years. The euphoria around investment grade is basically more broadly this euphoria around yields. At least relative to last year and really relative to most of the last decade, [high-grade corporate debt] is offering yields that are considerably higher.” For instance, average US investment grade yields have jumped to 5.45% from 3.1% a year ago. The soaring yields come as a result of the broad sell-off in fixed income over the past year as the Federal Reserve rapidly lifted interest rates to help tame sky-high inflation.

Finsum: Investors are piling into investment-grade bond funds due to historically high yields on safer debt after years of investing in riskier debt in search of returns.

If you’re looking to hedge your client’s portfolio from inflation, consider investment-grade ETFs. That is according to American Century Investments client portfolio manager Balaji Venkataraman. He spoke at the recent ETF Exchange conference in Miami Beach and noted how the Fed’s moves played a role in the dismal performance of bonds last year. However, he also added that investors may see increased value in fixed-income vehicles this year. He stated, “The rate risk has subsided meaningfully because the fixed income market tends to price in where the Fed is going well before the Fed gets there. And that’s why we’ve seen a decline in yields here today.” Venkataraman also noted that investment-grade bonds, which are a debt of higher-grade securities, could be critical investments during periods of heightened inflation, as yields begin to fall in response to the Fed easing rates. He stated, “The beauty of fixed income in this environment, if the Fed eventually does [come to] its peak in terms of the terminal rate, bond yields should probably continue to come down.” While bonds saw their worst year on record last year, fixed-income ETFs continued to see inflows. That trend continued into this year, as bond funds saw $20.8 billion in inflows in January, the most of any asset class last month, according to data.  

Finsum:According to American Century Investments client portfolio manager Balaji Venkataraman, investors should consider investment grade bond ETFs during periods of heightened inflation, as yields begin to fall in response to the Fed easing rates.

Morgan Stanley recently announced the launch of an exchange-traded fund platform with the listing of six Calvert ETFs on NYSE Arca, including an actively managed fixed-income ETF. The Calvert Ultra-Short Investment Grade ETF (CVSB) will focus on investment-grade debt issuers. Managers Eric Jesionowski and Brian S. Ellis seek to maximize income, to the extent consistent with the preservation of capital, through investment in short-term bonds and income-producing securities. Investors will gain diversified short-term fixed-income exposure to an actively managed portfolio of high-quality bonds of issuers that Calvert believes are demonstrating effective management of key ESG risks and opportunities. The other five ETFs include four indexed ESG equity strategies and an active ESG strategy. The funds include the Calvert US Large-Cap Diversity, Equity and Inclusion Index ETF (CDEI), the Calvert US Large-Cap Core Responsible Index ETF (CVLC), the Calvert International Responsible Index ETF (CVIE), the Calvert US-Mid Cap Core Responsible Index ETF (CVMC), and the Calvert US Select Equity ETF (CVSE). As part of the announcement, Dan Simkowitz, head of Morgan Stanley Investment Management, said the following in a statement. “This launch is the first step in MSIM’s development of a robust ETF platform that supports products across our businesses, asset classes, jurisdictions, and brands.”

Finsum:Morgan Stanley announced the launch of an ETF platform and the listing of six Calvert ETFs, including an actively managed ultra-short investment grade ETF.

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