Yield-hungry investors buoyed by the prospects of further monetary easing have invested $124bn in bond exchange traded funds globally this year.
“EPFR Global-tracked Bond Funds took in over $9bn for the second week running as investors responded to predictions of a rate hike-free remainder of 2016 in the US and fresh monetary tailwinds for emerging markets,” said EPFR.
Flows into long-term US corporate debt set a new record last week and a net $123bn has been invested in US bond ETFs in the year to date.
“Yields have been very low,” said Paul Malloy at Vanguard. “Between European Central Bank QE and rumours of the Bank of England QE, as long as there is that kind of support in the market, fixed income is still a place where investors will move to.”
UK bond funds even withstood Brexit fallout. In the two weeks following the Brexit vote, assets in UK bond funds held tight while funds in UK equity ETFs fell 11 per cent — $4.7bn — the highest level of outflow since at least 2007, and money market funds assets were down 9 per cent, on Société Générale data.
Assets in bond ETFs are still less than 1 per cent of the $94tn global debt market and only a quarter of the $2.6tn invested in equity ETFs.
However, BlackRock — the world’s largest provider of ETFs — believes fixed income funds are reaching a tipping point in acceptance and the company forecasts bond ETFs will grow to $2tn in assets by 2025.
”Structurally, we are seeing a shift in adoption of using bond ETFs within portfolios, particularly institutional investors, asset managers and hedge funds,” said Stephen Cohen, head of fixed income beta at BlackRock.
Bond markets have become less liquid following increased capital requirements and regulations.
Banks — the traditional intermediary — have cut their fixed income inventories.
Mr Cohen believes ETFs are part of the solution. “Fixed income investors are becoming more comfortable with ETFs and [more are] using ETFs as a fixed income tool within their portfolios.”
Paul Malloy, head of fixed income at Vanguard, added that the industry would get “a nice tailwind” from the additional transparency provided as MIFID II moves more ETF trading on to exchanges.