Todd Rosenbluth, head of research at VettaFi; Jérôme Schneider, Head of Short-Term Portfolio Management and Funding PIMCO; and Dan Wiener, Independent Advisor Editor for Vanguard Investors and President of Advisor Investments, discussed the flip-flop currently occurring within bonds as inflows surge for some bond ETFs after outflows for most of of the Year on This Week’s ‘ETF Edge’ hosted by Bob Pisani on CNBC.
It has been several months of bleeding for bond investments this year as the Fed began its rate hike cycle and embarked on quantitative tightening this month. After so many months of strong outflows, however, some areas of bond funds are starting to see interest and investment again.
Understanding history and performance over the past decade comes down to understanding the shifts in yield curves, Schneider said. What is happening in the markets right now is a regime shift with the setting of new limits for bond performance, according to Wiener.
Bond-linked mutual funds saw outflows in May, but bond ETFs actually saw inflows, a change that can be attributed to more investors embracing the ETFs structure, Rosenbluth said.
“We’re really seeing that investors are more comfortable with the choices they have within the ETFs structure they have never done before; the liquidity is so much stronger if you want to be more tactical with fixed income ETFs than with fixed income mutual funds,” Rosenbluth explained.
In May, inflows into bonds were seen in municipal bonds, high yield bonds and short-term treasury bills.
The discussion shifted to the tax-loss reaping that is likely happening in bonds right now, as investors shift from some bond allocations to others or reduce their bond allocations and instead look to other investment avenues, before turning to the discussion of assets versus liabilities overall and within fixed income securities.
“What we’ve seen is that active managers can add value by taking on credit risk versus the broader market, and advisors are embracing that,” Rosenbluth said. “At VettaFi, we’ve done surveys and webcasts and spoken to advisors to understand, and what they’re telling us is that they want an active strategy that can help navigate this environment we’re in. we find.”
There has been talk recently that the “Fed put” is no longer in place in equities and that even if stock markets fall dramatically, the Fed will not intervene. On the other hand, some believe there is to some extent a “Fed put” within bonds, as it is in the government’s interest to keep yields from rising too high, said Geraci.
“I think what we need to be clear here is the initial discussion about market liquidity, and the Fed has clearly cut the tail in market liquidity in terms of ensuring that fundamental liquidity is available in the repo market and, more importantly, trying to create mechanisms to ensure that primary dealers will always have an incentive to remove primary issuance,” Schneider said.
The funds discussed included the iShares National Muni Bond ETFs (MUB ) and the iShares iBoxx $ corporate high yield bonds ETFs (HYG ).
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