Displaying items by tag: ETFs

Inflows into fixed income ETFs have continued despite major losses in bonds over the last couple of months. Further, there is no clear indication when the tide will turn given expectations of high supply in the coming months and ambiguity about the economy, inflation, and Fed. 

The most liquid and popular bond ETF, the iShares 20+ Treasury ETF (TLT) has had $17.9 billion inflows so far this year. Assets under management have swelled to $41 billion as well. The biggest driver of flows is due to institutions, pension funds, and family offices that have a mandate regarding fixed income exposure.

Another factor driving demand is that yields are at their highest level in 16 years due to the Fed’s rate hikes. A longer-term trend that supports fixed income flows is that many investors and wealth managers are increasingly favoring ETFs over mutual funds due to lower costs and better liquidity. 

ETFs could also be better suited for volatile environments given that they can be used to harvest tax losses. Additionally intraday liquidity means that exposures can be shifted more easily to achieve precise targeting. 

Finsum: Fixed income ETFs continue to experience healthy flows despite significant volatility.

2023 has been a volatile year for bonds due to a better than expected economy and hawkish Federal Reserve. Yet, inflows into bond funds are up 38% compared to this time last year at $235 billion according to Blackrock.

The firm sees fixed income demand driven by high yields and the desire to reduce portfolio volatility. Currently, the 10 year Treasury is yielding 4.6% which is 90 basis points higher than at the start of the year. In contrast, the 10 year was yielding around 1% in October 2021.

Currently, the central bank is in a ‘wait and see’ mode regarding further hikes and the duration of the current cycle. Wall Street analysts anticipate that flows should further pick up once it’s clear that the tightening cycle is over as they look to lock in yields at these levels. 

In terms of fixed income ETFs, the iShares 20+ Year Treasury Bond (TLT) has been the biggest beneficiary with $17 billion of net inflows YTD despite a 13% drop. However, there is less enthusiasm for riskier fixed income due to concerns that a recession could lead to a spike in defaults as inflows into lower-rated bond funds have lagged. 

Finsum: Fixed income inflows have been strong all year despite considerable volatility and uncertainty about the economy and Fed.

In recent weeks, there has been a major outflow out of fixed income ETFs, following the breakout in long-term yields to their highest levels since 2007. According to Bill Gross, the co-founder and former CIO of PIMCO, retail ETF investors are reducing their holdings and contributing to volatility. 

He commented in a CNBC interview that “Over the last few days, large bond ETFs that number in the $100bn range, are experiencing higher volume, which indicates small investor vigilantes are selling. They have been spooked over the last week or so by declines of 3%, 4% and 5% in their bond ETFs.”

In terms of the bigger picture, he attributes the weakness in fixed income due to the federal government’s $2 trillion deficit and the large amounts of incoming supply necessary to finance it. Another contributing factor is the Federal Reserve’s quantitative tightening program which is also adding to supply. Ultimately, he sees yields on 10-year Treasuries reaching as high as 5%.  

He believes the Fed is done hiking this cycle. However, he doesn’t see much upside for long-duration fixed income even if the Fed starts cutting rates due to sticky inflation, nearly 30% of Treasury supply maturing in the next couple of years, and structurally high deficits. 

Finsum: Bill Gross shared some thoughts on the bond market and how recent fixed income ETF outflows are contributing to volatility. 

Following poor performance in Q3, fixed income is struggling to start the new quarter. SImilar to Q3, the bulk of weakness is in long-duration bonds. This is evident with the iShares 20+ Year Bond ETF (TLT) which fell to its lowest levels since August 2007. Remarkably, TLT is now at levels prior to the entire bond bull market which began at the depths of the financial crisis as central banks embarked on more than a decade of ultra-easy policy to support the economy.

So far, TLT is down 13% year to date. It’s the largest fixed income ETF, and many investors’ preferred vehicle to get exposure to long-term Treasuries. There is some disagreement on the causes behind the move in long-term yields with some pointing to large amounts of Treasuries that will be auctioned off in the coming months to finance the federal government’s deficits. Others believe that the bond market is finally accepting the reality that inflation is now entrenched and that higher rates are here to stay. 

Some with a longer-term view don’t see much unusual about the breakout in long-term yields given that this tends to happen when central banks embark on tightening policy. As a result, we are seeing the curve un-invert as the spread in yields between short-duration and long-duration bonds continue to shrink.

Finsum: TLT is the most popular fixed income ETF. It’s now at its lowest levels since 2007 as long-term Treasury yields break out to new highs.

Despite a down Q3, retail investors continue piling into fixed income ETFs, both long and short-duration. They don’t seem too fazed by the recent hawkishness from the Fed or recent calls for continued strength in yields. 

Last week, inflows into the most popular Treasury ETF - the iShares 20+ Year Treasury Bond ETF (TLT) reached its highest levels since March 2020. In Q3, TLT was down 13%. This turned a small yearly gain into a more than 10% decline. Despite this performance, TLT has had $4 billion of inflows in Q3 and has seen short interest decline as well. 

Clearly, retail investors have a contrarian bent as many strategists are calling for further weakness in bonds, and Fed fund futures markets increased their odds of further hikes while decreasing odds of cuts in 2024. 

Some of the inflows into fixed income may be due to concerns about equities and economic growth given recent soft labor and consumption data over the last few weeks. THerefore, they may be looking to take advantage of the highest yields in decades and the potential for price appreciation in the event of a recession or further cooling of inflation. 

Finsum: Fixed income ETFs are seeing continued inflows despite poor performance in Q3. Here are why retail investors may be buying the dip.