BONDS: US government two- and three-year bond yields are now at quadruple their post global financial crisis average and well above the long-term average (see chart). Bonds are attracting significant fund inflows, with yields high and the inflation shock easing. A newer breed of target maturity exchange traded bond funds are also proving popular as a way to lock in current high yields, along with low cost and diversification of the ETF structure. They are not for everyone, with maturity reinvestment risk at potentially lower yields, but illustrate renewed bonds interest.
FLOWS: Money has flooded into both money market funds and bonds this year, searching for both security and income. Last year’s equity bear market drove a significant search for safety. Whilst the US interest rates and bond yields now on offer are the highest in years after the Fed’s dramatic interest rate cycle and the historic bond market pullback last year. Equity funds saw $90 billion outflows this year, despite their near double-digit returns this year. US money market inflows have been $180 billion, draining deposits from banks and pressuring their profit margins. Whilst bond funds have seen $80 billion of inflows. A growing niche has been to so-called target maturity exchange traded bond funds (ETFs), offering yield transparency and low cost liquidity.
TARGET: This type of bond fund offers the closest experience to owning an individual bond, but with the advantages of an ETF. It holds its bonds until they mature, giving the opportunity to lock in current yields. Investors will continue to get the initial yield even if interest rates come down in the future. Whilst the fixed maturity and return of principal at a set date allows investors to plan for future known expenses and liabilities by matching needs with bond fund maturities. Such as retirement or buying a house or paying university fees.They were popularized by BlackRock with the 2010 launch of its iBond range, and with its US Treasury and Corporate bond versions.
All data, figures & charts are valid as of 29/05/2023