Bond Markets Shift From Pain to Gain

Bond Markets Shift From Pain to Gain

After record fund outflows in 2022 are steadily picking up momentum in the new year thanks to rising yields and subsiding inflation, 

According to data from fund flow tracker EPFR, the inflows into funds that buy investment-grade corporate debt around the world have climbed to a total of $19bn since the start of 2023, - the most ever at this point in the year. The cash flooding into the asset class emphasizes investors’ ambition to buy into historically high yields provided by secure corporate debt after a massive sell-off last year.

Average US investment grade yields have climbed to 5.45% from 3.1% a year ago, reaching their highest level since 2009. The bulk of that rise came on the heels of an extensive fixed-income sell-off throughout last year as the Federal Reserve and other major central banks were swiftly raising interest rates in a bid to curb sky-rocketing inflation.

“People basically think that fixed income, in general, looks a lot more attractive than it has in prior years,” Matt Mish, head of the credit strategy at UBS pointed out in his message to Financial Times.

Today’s fixed income yields range from around 4,8% (global investment grade credits) to more than 8% respectively for emerging markets (EM) and high yield.

“At these levels, an actively managed fixed-income portfolio may help Asian investors navigate the markets and generate returns within the fixed-income universe, without having to sacrifice liquidity,” Frieda Tay, fixed-income Institutional portfolio manager at MFS Investment pointed out to Asian Investor.

Bond exchange-traded funds saw approximately $200 billion of inflows last year, and have amassed roughly $26 billion in inflows in January alone.

“We’ve seen higher-quality investment-grade corporate bond ETFs. We have seen high-yield fixed-income ETFs inflows this year, as well as some of the safer products,” Todd Rosenbluth, head of research at VettaFi, told ETF Edge CNBC on February 13.

Analysts at Goldman Sachs have already turned “slightly bearish on high-quality US corporate bonds,” as they pointed to the “re-emergence of cash as a competing and rewarding alternative.” “The easy money has already been made,” said chief credit strategist Lotfi Karoui in a message to Financial Times.


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