Fixed income investing in the U.S. seems caught between two opposing forces lately. On the one hand, flared up of geopolitical risks and downbeat job data for the month of March may trigger market risks and safe-haven rally. On the other hand, moderately upbeat U.S. economic sentiments and the Fed's policy tightening attempt to push up bond yields, which are weighing on bond prices.
As per an article published on Seeking Alpha , investors yanked over $18 billion from bond mutual funds and ETFs in the one week following last November's election, marking the biggest one-week outflow in over three years.
The outflow was prompted by a spike in bond yields caused by rising inflationary expectation. Trump's pro-growth promises and deregulations basically boosted stocks and hurt fixed income investing.
Trend Reversal in 2017
Barring some occasional pull-backs, investors' interest in fixed income investing returned in the first quarter of 2017. Over $112 billion was inserted into fixed income funds since January 1 and the benchmark 10-year Treasury yield touched 2.31% on February 24 (read: ETF Asset Report for First Quarter of 2017 ).
However, the possibility of a rate hike in the Fed's March policy meeting, took bond yields to this year's high of 2.62% on March 13. But the Fed's dovish guidance on the future rate hike trajectory, rise of geopolitical threats and market slump on Trump's policy concerns charged up bond investing once again.
Plus, the highly watched out meeting between Trump and Chinese president Xi Jinping kept Wall Street on the edge for the most part of last week, which is why stocks remained volatile, pushing up safe-haven bets like benchmark U.S. Treasuries.
If this was not enough, the Fed indicated deleveraging of balance sheet to start this year. This could keep the Fed from hiking rates fast this year. The overall impact took the yield on the 10-year U.S. Treasury note to 2.38% on April 7, 2017.
U.S. Treasuries in Focus
Long-term U.S. Treasury bond fund iShares 20+ Year Treasury Bond ETF TLT has added about 680 million (net) so far this year. The fund yield 2.56% annually (read: ETF Strategies to Win if Fed's Reverse QE Hits Soon ).
Emerging Market Bonds in Focus
Not only U.S. bonds, emerging markets bonds are also on investors' radar. Emerging market companies and governments sold $178.5 billion of dollar-denominated debt in Q1, marking the highest quarterly amount ever.
iShares JPMorgan USD Emerging Markets Bond ETF EMB hasgathered ever more $1.95billion in assets so far this year. EMB, which gives an exposure to U.S. dollar-denominated government bonds issued by emerging market countries, yields about 4.72% annually.
EM economies are much more protected from Fed tightening shocks this time than they were in 2013, which is remembered for the taper-tantrum. As a result, strong fundamentals call for EM investing lately. And since fixed-income securities are less risky than equities and offer solid yield, investors are all the more keen on these products (read: Dollar Denominated EM Bond ETFs: A Good Play for 2017? ).
U.S. Corporate Bondsin Focus
The trend is also bullish for U.S. corporate bonds. iShares iBoxx $ Investment Grade Corporate Bond ETF LQD has raked in about $3.46 billion in assets so far this year (as of April 7, 2017). LQD yields about 3.28% annually.
To Sum Up
A still-low interest rate environment and a 'muddle through economy' indicate that investors still favor fixed income investing for a regular source of current income, but with relatively less risk.
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