Bond ETF inflows collapse to lowest level since pandemic began

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Investors are turning their backs on exchange-traded bond funds amid inflation concerns, with inflows falling to their lowest level since the start of the Covid-19 pandemic.

Bond ETFs recorded global net inflows of just $ 14 billion in November, according to data from the iShares arm of BlackRock, the lowest reading since March 2020, when markets were rocked by the emergence of the novel coronavirus .

Many traditional corporate and high yield bond ETFs will have even worse, as investors increasingly seek to hedge against the ravages of rising prices through inflation-linked bonds or government debt. in the short term, iShares found.

In November, 37% of fixed income flows went to inflation-linked bonds, while sovereign debt funds – often focused on China – absorbed an additional 44%, leaving corporate bonds behind. , especially high yielding ones, set aside in the cold.

“[There has been a] evolution of the mix towards rates [sovereign bonds], indexed to inflation and China [government bonds]”said Karim Chedid, head of investment strategy for iShares in the Emea region.” We see them continue to be important drivers in 2022 due to the need to hedge against inflation and research revenues.

“Investors express a preference for a shorter duration,” while corporate bonds “have seen slow buying and high yield have seen exits,” Chedid said, although he said he there were signs that the Europeans were starting to buy lower corporate bonds. early December.

“This has been the year of equities,” said Jose Garcia-Zarate, associate director, passive strategy research at Morningstar.

“[There have been] some flows into the fixed income markets, mostly directed to inflation-indexed and short-term debt in anticipation of a central bank rate hike in 2022. There is very little value in the equity markets. developed fixed income securities, ”Garcia-Zarate added.

China was an exception to the general gloom in sovereign bond ETFs. “There has been a further opening of the Chinese bond market to international investors. It has become a very attractive place, simply because of the return they offer compared to developed markets, ”he said.

“The credit quality is good. You know the Chinese government is going to reimburse you. The major emerging market bond indices have lost money this year. China has made a lot of money.

Some ETF providers have taken advantage of this trend with the $ 12.1 billion iShares China CNY Bond Ucits ETF (CNYB) becoming the second bond ETF in Europe just two years after its launch.

Matthew Bartolini, Head of SPDR Americas Research at SSGA, agreed that a rotation was underway, characterized by outflows from traditional corporate and high-yield bond ETFs to inflation-protected US Treasury securities. (Tips), which recorded their second highest monthly inflows on record in November, trailing only October, and ETFs specializing in senior loans, which are variable rate and occupy an important place in the capital structure of companies .

However, Bartolini noted that fixed income securities were still “on track to have over $ 200 billion in inflows this year.” It would be the second year in a row and it has never happened before.

Data from ETFGI, a consultancy firm, showed net inflows of $ 211 billion into bond ETFs in the first 11 months of 2021, in line with last year’s record, although a fraction of the 789 billion dollars that equity ETFs have attracted.

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