Investors return to corporate bond and fixed income EFTs
Investors are turning to corporate bond ETFs amid the current economic uncertainty reaching $32.5 billion in fixed income and $13.8 billion in credit or corporate bond ETFs. In both cases with substantial advances with respect to July indicated by BlackRock of 3.2 billion dollars and 9.9 billion dollars respectively according to Emma Boyde in the Financial Times.
Investment-grade credit vehicles accounted for the largest share of inflows, at $9.9 billion in July. Investment-grade ETFs focused on Europe stood out, attracting $2.2 billion in net new cash in July, the highest monthly inflow since April 2020, when markets began to recover from the initial shock of the pandemic.
"In the first half of the year, European corporate credit became increasingly attractive against government bond rates and equities," said MJ Lytle, chief executive of Tabula Investment Management, a specialist in bond ETFs.
Lytle noted that yields had risen during the first half from less than 1% to more than 3.5% for European investment-grade bonds and from around 3% to nearly 8% for European high-yield paper. When bond yields go up, prices go down.
"European high yields have been trading at levels rarely seen since the global financial crisis, peaking in July above 93% of all readings since late 2009," Lytle noted. "July's inflows into European corporate credit ETFs suggest a turning point in terms of investor confidence as investors look to capitalize on these higher returns."
Karim Chedid, head of investment strategy at BlackRock's iShares ETF arm in the Emea region, also highlighted the attractiveness of the prices. "Investors may be looking at cross-sector allocation because credit looks cheaper than equities," Chedid added. But he added: "Credit is not cheap at all, it's cheaper than it used to be, so it's a sign that investors are seeing value."
However, BlackRock noted that the reversal was a continuation of the "inconsistent flows" that have been a trend this year.
Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, agreed, saying the fundamentals hadn't changed much.
"Looking at the flows of investment grade ETFs denominated in euros domiciled in Europe, I can see that there have been net inflows one month and outflows the next throughout this year," Lamont said.
However, Todd Rosenbluth, head of research at VettaFi, said investors were encouraged by indications that the US Federal Reserve was determined to tackle inflation.
The Fed raised its benchmark policy rate by 0.75 percentage point for the second consecutive month on July 27.
“As investors gained more confidence, the US Federal Reserve was better able to manage mitigating the impact of inflation and global investors were willing to take credit risk. Investors rotated from ultra-short duration bond ETFs to those with higher yields,” Rosenbluth said.
He said ultra-short duration ETFs, such as the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) and the iShares 1-3 Year Treasury Bond ETF (SHY), which hold Treasuries with very high interest rate risk low, had seen strong outflows in July.
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