A swift rise in bond yields in 2018 has sent fixed-income investors scrambling, with major categories of bond exchange-traded funds seeing steep outflows, while other groups have found favor.
While flows into bond products remain positive overall—extending a decadelong rotation into fixed-income from stocks—investors have retreated from notable categories, a sign they believe yields could continue rising, which would mean further deterioration in the funds, as prices and yields move inversely to each other.
Notably, the yield for the U.S. 10-year Treasury note
topped 3% on Tuesday and neared its highest level since 2011.
“The yield on the 10-year is at the high end of its range over the past decade, and while I think everyone is overly bearish on the bond market, it makes sense that those who are concerned would sell,” said John Burke, chief executive officer of Burke Financial Strategies.
Thus far this year, according to data from FactSet, $5 billion has been pulled from ETFs tracking U.S. corporate high-yield bonds. Another $4.9 billion has been pulled from U.S. corporate investment-grade bonds. Both stand as being among the highest outflows of any ETF category; the only group to see higher outflows thus far in 2018 is U.S. large-cap stocks, where investors have retreated amid a resurgence of volatility in the equity market.
The outflows from the bond categories largely represent redemptions in a few key funds, which dominate their respective areas in terms of assets. For “junk” bonds, $3.3 billion has been pulled from the iShares iBoxx $ High Yield Corporate Bond ETF
while almost $3.1 billion has been pulled from the SPDR Bloomberg Barclays High Yield Bond ETF
Those two funds, which have a combined $23.6 billion in assets, are by far the largest in the high-yield space.
For investment-grade bond funds, the outflows are almost entirely due to the iShares iBoxx $ Investment Grade Corporate Bond ETF
where $5.2 billion has been pulled. This was enough to turn flows for the whole category negative. (FactSet tracks 15 investment-grade bond funds; 10 of them have had inflows in 2018, albeit of small dollar amounts.)
A third U.S. bond category has also seen decisive outflows in 2018: corporate preferred stock, a category where $1.4 billion has been pulled. Again, this is largely attributable to a retreat from one fund, in this case the iShares U.S. Preferred Stock ETF
which has had outflows of $1.1 billion.
So far this year, iShares Core U.S. Aggregate Bond ETF
is down 3.3%, and it currently yields 2.46%, according to FactSet. To compare, the S&P 500 is down 1.1% in 2018, and its dividend yield is 1.82%.
The iShares investment-grade ETF is down 5.6% year to date; it yields 3.32%. The high-yield fund is down 2.1%, and it currently yields 5.1%.
“For people looking to maximize income, it’s hard to not put high yield in a portfolio right now,” said Burke. “Where interest rates and yields go is only half the story, the other half is credit, and whether defaults are going up or down. Since the economy remains strong, that half of the story should be good for high yield. We think now is more a time to buy than it is to sell.”
Other parts of the U.S. fixed-income universe have seen positive flows this year. Notably, the category of government Treasury cash equivalents has had inflows of $7.4 billion, while broad-market investment grade bond funds have had inflows of $6.7 billion. The category of broad-market investment grade floating rate funds has had $3.3 billion. All three are in the top 10 of fund categories in terms of 2018 inflows, including all asset classes.
Overall, U.S.-listed bond funds have had inflows of $28.9 billion in 2018 thus far, while $48.6 billion has gone into equity funds.