The bond ETF movement is sending an important signal to the market amid recent stock volatility and a new Fed chair facing a complex inflation environment.
“The flows speak for themselves,” Steve Leipley, global co-head of BlackRock’s iShares fixed income ETF, told CNBC’s Dominic Chu this week. And it’s a story of growing investor interest in yield across bond markets. “In the U.S., bond ETF flows are up an astonishing 60% compared to last year,” Leipley said.
Leipley said that while a significant portion of the flow is going into U.S. Treasuries, there is also a big move by investors into multi-sector income ETFs.
“The income story is very solid and persistent, as interest rates will continue to fluctuate and ‘real yields’ are definitely an opportunity,” he said, referring to bond yields net of inflation. “Real yields reflect the growth story,” he said, noting that the AI boom and associated expected productivity gains are the drivers.
Investor interest in multi-sector income funds also reflects a greater emphasis on “income per unit of time,” according to Ripley.
“The idea of extending the term a little bit more but really focusing on revenue…that’s kind of the sweet spot,” he said.
“Real yields are a very good friend of fixed income investors,” George Boley, chief investment strategist for fixed income at Allspring Global Investments, told Chu.
How the Fed fits into the fixed income investment picture
New Federal Reserve Chairman Kevin Warsh is alerting markets to signs of increased bond volatility as he formulates the central bank’s new approach. “The most important thing, at least for now, is the lack of forward guidance,” Boley said. At the time the Fed was telegraphing all its actions, managing duration risk was not a very active process for investors. Going forward, there will be more of an “uncertainty premium” built into the market, he said.
Boley said Warsh was clear at last week’s first FOMC meeting that he would maintain the Fed’s inflation-fighting credentials for the foreseeable future.
“The market is now pricing in multiple rate hikes by the Fed, and the front of the curve is very steep. You don’t have to go too far outside the curve to start seeing significant increases in yields,” Boley said.
Laipley said the recent decline in so-called break-even inflation has been “very sharp” on both the short and long ends of the Treasury curve, and that “the market is smelling something here.”
The break-even inflation rate is a measure of the difference between standard Treasury yields and Treasury inflation-protected securities.
“In a break-even situation, it’s not necessarily a bad time for investors who are still concerned about inflation to consider short-term TIPS,” Ripley said. But many bond investors “see this volatility as a thing of the past, and returns are at very attractive levels, no matter what yields are, compared to what they’ve seen in the past.”
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Trends in the US 10-year government bond yield in 2026.
One of the biggest debates in the market these days among investors is the lower risk premium associated with owning stocks rather than bonds.
Boley called it a “pretty attractive” environment for bond investors, but said there are some caveats. “We have to be a little bit careful because credit spreads are so tight,” he said, adding that he believes these spreads “are likely to continue.”
Tightening credit spreads between different bonds along the traditional risk spectrum are usually a sign of growing investor confidence, but some worry that it could potentially be a sign of market complacency.
“Moderate inflation is a meaningful tailwind for credit quality, and I think we’re in the middle of a broader credit supercycle,” Boley said. He added that as a fixed-income investor, “I would be happy to take the extra income, but I’m not very keen on going for it.”
The latest core inflation figures released by the government were the highest since October 2023, consistent with market expectations and reinforcing the need for the Fed to maintain its anti-inflation stance.
Chevron said oil prices have returned to pre-war levels as tankers transit the Strait of Hormuz again, but gasoline prices are likely to continue rising.
The labor market complicates matters for investors and the Fed as it tries to balance its dual mandate of maximizing employment and stabilizing prices. Ripley said about 90% of recent job creation has come from the health, government services and leisure sectors. “Most of the labor market is weak,” he said.
“The real point is… how much weight do you place on near-term inflation concerns versus a softening labor market or a very, very concentrated labor market,” Laipley added.
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