Bond ETF flows surge, up a ‘shocking’ 60%, says BlackRock exec

With recent stock volatility and the arrival of a new Fed chairman amid a complex inflation environment, the movement in bond ETFs is sending an important signal to the market.

“Flows tell the story,” Steve Laipply, global co-head of iShares fixed-income ETFs at BlackRock, told CNBC’s Dominic Chu this week. And this is the story of investor interest in yields in the fixed income market. “In the US, bond ETF flows are up a shocking 60% over last year,” Laipply said.

A significant portion of flows have gone into U.S. Treasuries, but investors have also made a significant move into multisector income ETFs, Laipply said.

“The yield story is very solid and persistent because rates will continue to change and ‘real yields’ are certainly an opportunity,” he said, referring to bond yields netting the inflation rate. “Real returns reflect a growth story,” he said, led by the AI ​​boom and the resulting expected productivity growth.

Investors’ interest in multi-sector income funds is also an indication that there is a greater emphasis on “revenue per unit period,” according to Laipply.

“The idea of ​​getting a little more time but still focusing on revenue … that’s kind of the sweet spot,” he said.

“As a bond investor, real yield is your very good friend,” George Bory, fixed-income investment strategist at Allspring Global Investments, told Chu.

How does the Fed fit into the fixed income investment picture?

New Federal Reserve chairman Kevin Warsh has put the market on alert amid signs of greater volatility in bonds as he shapes a new approach at the Fed. “The major issue, at least right now, is the lack of forward guidance,” Bory said. As the Fed communicated every move, managing duration risk was a less active process for investors. He said there would now be more “uncertainty premium” built into the market.

At the first FOMC meeting last week, Warsh was clear about maintaining the Fed’s commitment to fighting inflation for now, Bory said.

“The front end of the curve is now very steep as the market is currently pricing in multiple rate hikes from the Fed. You don’t have to get too far out of the curve to start seeing a very significant increase in yields,” Bory said.

Laipply said recent declines in what is known as the breakeven inflation rate, which has fallen “very, very sharply” at both the short and long ends of the treasury curve, tell him “the market is smelling something here.”

The breakeven inflation rate is a measure of the difference between standard treasury yields and treasury inflation-protected securities.

Where there are “breakeven points,” Laipply said, it is not necessarily a bad time for investors to consider short-term TIPS still worried about inflation. But he said many bond investors “ignore that volatility and are at a level where yields are very attractive relative to the past, regardless of yields.”

One of the biggest debates among investors in the market recently is decreasing risk premium to hold stocks over bonds.

Bory called it a “pretty attractive” environment for bond investors but said there were caveats. “We need to be a little careful because credit spreads are so tight,” he said, adding that he thinks those spreads will likely “stick with us.”

Tighter credit spreads between various bonds across the traditional risk spectrum are generally a sign of higher investor confidence, but some worry it could potentially be a sign of market complacency.

“Modest inflation is a meaningful headwind for creditworthiness, and I think we are in a supercycle for credit more broadly,” Bory said. He added that as a fixed-income investor, he “would be happy to take the extra income, but wouldn’t be too aggressive in pursuing it.”

The latest core inflation data from the government was at the highest level since October 2023 but was in line with market expectations and reinforced the need to maintain the Fed’s inflation-fighting stance.

Although gas prices are likely to remain high, oil prices have returned to pre-war levels as tankers re-passed the Strait of Hormuz, according to Chevron.

The labor market complicates the story for investors and the Fed as it tries to balance its dual missions of maximum employment and price stability. Laipply said about 90 percent of jobs created recently are in healthcare, government services and entertainment. “Most of the labor market is soft,” he said.

“The real question is how much weight do you give to short-term inflation concerns versus a softening labor market, or in other words, a very, very concentrated labor market,” Laipply added.

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