Inflows into fixed-income ETFs have continued despite major losses in bonds over the last couple of months, as investors are bracing up for higher interest rates era to linger.
Fixed income ETFs listed across the US and Europe attracted a record $235bn of net inflows in the first three quarters of this year, according to data compiled by BlackRock, up from $169bn in the same period last year and $222bn in the first three quarters of 2021.
According to the Financial Times, the majority of fund inflows on both sides of the Atlantic have been into sovereign debt ETFs with high credit ratings. US Treasury ETFs pulled in just in excess of $100bn in the year to October 9. 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.
However, the relentless rise of yields has pushed prices down and left investors who own bonds with long-dated maturities nursing heavy losses. An iShares ETF, which owns Treasuries with a maturity date of 20 years or longer, is down by 12.9% this year.
“Because short-term rates have been much higher than longer-term rates it makes sense that investors have focused on one-to-three month ETFs,” Rohan Reddy, director of research at fund manager Global X told Financial Times. The trend reflects a broader surge of capital into money market funds this year from investors seeking an alternative to cash.
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.
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