Fears about inflation and the desire for sustainability are driving investors’ choices regarding fixed income securities. And to make the big voice, in this context, are the bond ETFs. While those looking for yields look to High Yield or emerging markets. The trends were highlighted in a recent EMEA fixed income report published by BlackRock.
The worry of inflation
Therefore, concern about inflation and interest rate volatility is at the fore. Looking beyond the transitory nature of the current surge in inflation related to reopenings, the BlackRock Investment Institute (BII) points out that the consumer price index will rise steadily over the medium term, as easing monetary policy measures allow the economy US to function.
Bond ETF flows data show that investors are shifting their allocations to use bonds linked to inflation with YTD inflows of $ 3 billion (as of May 31, 2021) versus $ 4.2 billion for the whole of 2020, as well as short-term corporate and government bonds to minimize interest rate volatility. The liquid and flexible nature of fixed income ETFs is allowing investors to remain agile and able to adapt to changing market conditions.
The push of the ESG
Another hot topic for investors is ESG. Sustainable flows across all major fixed income asset classes continued to be positive, with total flows into fixed income ESG ETFs reaching $ 12.6 billion as of May 31, 2021, driven primarily by investment grade credit , which accounted for 73% of this total. Flows of sustainable fixed income ETFs are far outpacing industry inflows into traditional year-to-year non-ESG exposures – as of May 31, 2021, they amounted to only about $ 3.3 billion.
Investors increasingly want to understand the impact of sustainability on their fixed income exposure. Despite the growing caution of investors towards fixed income, as an asset class, in recent months, the the trend to move away from traditional or non-ESG funds to actively switch to sustainable exposures is accelerating.
The hunt for yield
But with an interest rate scenario still at its lowest, there are always those who are looking for yield. High Yield continues to be favored by investors in 2021, as it is also an asset class with a shorter duration than Investment Grade, in addition to its strong fundamentals. HY ETFs had $ 2 billion in inflows as of May 31, 2021, with a strong preference for USD HY exposures, supported by lower EUR / USD hedging costs, along with higher exposure to energy names. Looking at the part of the fixed income market that yields more than 2.5%, more than half is made up of Chinese bonds and investors are taking more and more note: the yield on Chinese 5-year government bonds is 3% compared to the previous year. 5-year US Treasury equivalent, which returns only 0.9%, offering a yield of 2.1%. The inclusion of onshore bonds in global indices provides a structural tailwind, while the low correlation with other major markets attracts investors looking to build resilience against market volatility. Against this backdrop, Chinese onshore bond ETFs raised more than $ 4 billion in inflows as of May 31, 2021, mainly used for strategic asset allocation purposes by a diverse range of investors including asset owners, asset managers and wealth managers, as well as from multiple geographical areas.
In short, the report offers some very interesting insights into the fixed income segment. Bond ETFs are certainly a viable option for investors at this stage of the market. And the more daring can too look to High Yield and Chinese bonds to try and get a bit more full-bodied returns. Always keeping in mind the mantras of the investment world: diversify, govern emotions and adopt a long-term view.