Displaying items by tag: bonds
Bond outflows are starting to slow as a response to rising rates and lower prices. The Fed’s hawkish policy stance has been elevating prices but now they are relatively attractive given the return. Previously bond prices were held purely as a safety net because yields on government debt generated no income, but rising rates are making them a competitive income option for those investors. In addition, more investors are looking for a way to mitigate volatility in these trying times, which has them shifting toward bonds and out of high-risk assets. Additionally, a whole new generation of investors are much more comfortable with ETFs and are thus turning to bond funds as their source of security.
Finsum: Bonds could make a comeback if inflows turn around they could be bottoming out price-wise.
It’s no secret bond funds have been on a track of suffering the last couple of months, but that might be turning around especially with mutual fund competitors. The counter cyclical effects of bonds and equities have broken down. In the month of May bond mutual fund outflows increased rapidly to over $90 billion, but bond ETFs saw an increase of $34 billion. Many mutual funds have been losing slowly over time to their ETF competitors. One of the complexing aspects of this relationship is that there has been a significant increase in active ETFs in the last couple of years. The Feds impact on interest rates have really shifted the traditional 60/40 portfolio because rising rates have contributed to the spiking volatility.
Finsum: The increase in active ETFs particularly for fixed income is a direct result of the macro alpha that is more prevalent than ever.
There has been a sharp uptick in the high-value bond ETF trades in the last 12-months which most investors are attributing to activity from large institutional investors. Transactions are up as much as 36% on some platforms from the previous year. This has been part of a longer more ongoing trend that has been successful for many bond funds. Since the GFC, investors have questioned the resiliency of these funds to economic downturns, but regulators and investors alike are pleased with their performance in the covid pandemic. Just as important to this is the support from the Fed and Fiscal policy to the economy. Stepping in with bond relief has helped these ETFs. Finally, the increase in investment in bond ETFs has actually led to tighter underlying spreads in bond markets themselves and reflects better liquidity.
Finsum: Many believe that over-investment in index funds could be disruptive to equity volatility over time, but it appears to be stabilizing bond spreads.
Macro conditions have left many investors skittish regarding the future of fixed income funds, but BlackRock is firm in its belief in the future of Fixed Income ETFs. BR said that despite headwinds from rising rates and inflation they expect bond ETFs to surpass $2 trillion in the next year and a half and to hit $5 trillion by 2030. While the current environment doesn’t make investors ecstatic about the bond market future, many overlook the traditional role they fill in a portfolio: stability. That resilience especially during volatility and the ultra-low rate environment has proved useful enough for many investors.
Finsum: ETF trends have been amplified by the pandemic and will be enduring moving forward.
State Street launched a new fund LQIG which started trading on May 12, an effort to give investors exposure to liquid bonds with high traceability. The market is rife with turmoil, and investors are looking to different fixed-income products to provide an inflation-beating yield and relatively liquid assets. The fund seeks exposure to 400 investment-grade corporate bonds denominated in dollars. These differ from most fixed-income funds which are designed to give broader market exposure that doesn’t prioritize traceability. The high traceability comes with lower bid-ask spreads as well as more transparency into their holding's real-time valuations.
Finsum: Investment-grade corporate debt is looking relatively more attractive with market volatility at such highs.