Displaying items by tag: bonds

The latest data release from BlackRock’s iShares division revealed troubling news about the state of Bond Market ETFs: inflows slumped to just $14 billion which is the lowest since the onset of the pandemic. It's the taxable corporate bond market that's fairing the worst as investors are pouring less dollars into traditional corporate debt and junk bonds, amid fears of inflation eating yields. Instead, investors are turning to shorter duration and inflation protected bonds. Nearly 40% of fixed income flows went into inflation linked bonds, an almost unprecedented number. Investors have also started to put inflows into Chinese bonds as the international sovereign debt market was a relative winner among bond ETFs. China’s yield is the biggest draw to international investors as they see the debt as relatively secure and paying more than developed countries.

FINSUM: Expect corporate bond outflows to continue until the TIPS spread starts turning towards the Feds 2% inflation objective.

Over 500 institutional investors were surveyed and one of the top 5 most important themes going into 2022 is active management in areas like fixed income markets. A combination of factors are leading to more investment but broadly speaking, it is uncertainty which is having investors leaning into active management. On top of this, active management is preferred as the best strategy in risk management overall. A majority of those surveyed believe high fluctuation in inflows and outflows to passive funds put the market in a more systemically risky position. Despite a dragging start to 2021, 70% of investors said their active funds outperformed passive ones.

FINSUM: Picking stocks is always hard, but increased volatility could give pickers an edge.

Jerome Powell and the Fed turned a 180 this week with the future of its asset tapering and interest rate hikes. The Fed sees Covid and omicron as yesterday's demons and have set their sights on inflation. With that the Fed is gearing up for potentially three rate hikes in 2022 and is moving away from the transitory inflation story. This could be bad for bond investors as the Fed’s tune could change if omicron picks up or inflation shifts gears, meaning there is a lot of uncertainty about future rates. Nonetheless, higher rates could undercut existing long term bonds so those still invested in bonds should consider switching their investments to shorter duration Fixed Income ETFs or less sensitive corporate bonds. Lower duration bond ETFs will be more stable when there is interest rate uncertainty (unlike in standard times).

FINSUM: The Fed could just as quickly hop off the inflation fighting hawk train if they get a series of lower PCE reports, which means investors need to be ready for various scenarios.

Saying the bond market is difficult would be more than an understatement, and while yields are creeping it's still hard to get the historic performance. However, many investors are turning to active fixed income ETFs. This has led to a swelling of inflows into the market category making up 16% of ETF inflows in 2021 through October. Turmoil at the Fed and the continual threat of a taper tantrum have many investors looking to pros to sort out the difficulties in the bond market. Active FI ETFs can also fit narrower targets and accommodate the rapidly shifting macroeconomic environment.

FINSUM: Seasoned veterans at the helm make the most sense when the environment is shifting, and active ETF can edge out when the future is uncertain.

The low yields in the bond market have made it relatively uninteresting to the average investor, but there is a revolution underway. The bond market has been dominated by traditional techniques and old school investors, but many of the quants and hedge funds that overturned the equity market are eyeing the bond market. Systematic corporate bond investing is expanding and firms are taking advantage of trends in government debt or pricing anomalies in bond derivatives. Driving this trend in the bond market is swaths of data that are a part of how trades are now realized. Companies like Blackstone Credit are prepared for the shift into a more systematic trading environment in bonds, and other companies are ramping up their tools to accommodate this shift. FINSUM: Hard to acquire data, and a less liquid market have made bonds less desirable for quants, but the information age is rapidly changing that standard.