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A resurgence of investor enthusiasm for bonds and growing confidence in a “soft landing” for the U.S. economy has energized some of the world’s largest financial groups, driving record inflows into fixed income exchange-traded funds. It’s causing it.
BlackRock and JPMorgan Chase & Co. said Friday they put an unprecedented amount of new assets under management in the third quarter as they reported better-than-expected quarterly profits.
Bond giant Pimco has announced that its assets under management have reached $2 trillion for the first time since Russia’s full-scale invasion of Ukraine in 2022 caused bond and stock markets to collapse.
“I’ve been investing in fixed income for over 30 years, and the current environment is one of the most attractive for active managers I’ve seen in the public markets,” said Dan Ivascyn, Pimco’s chief investment officer. ” he said.
Across the industry, lower central bank interest rates and the outlook for favorable economic conditions have given investors greater confidence that bonds will maintain their value and provide competitive returns. That brought $123 billion into U.S. bond funds in the quarter that ended Sept. 30, including $93 billion into ETFs, according to Morningstar Direct data.
“The long-awaited Great Rotation, where investors come off the sidelines and start ‘re-risking’ by investing in stocks and fixed income products, is starting to materialize,” said Edward Jones analyst Kyle Saunders. said.
Stock markets rebounded quickly in 2023, but many investors opted for cash savings instead of bonds as central banks, including the U.S. Federal Reserve, rapidly raised interest rates to curb inflation. But central banks are now changing course due to concerns about growth.
JPMorgan and Wells Fargo executives said Friday that while consumer discretionary spending has slowed, there are no signs of major economic distress. That raised hopes that the Fed, which cut interest rates by 50 basis points last month, was able to tackle inflation without triggering a recession in a so-called soft landing.
Analysts say this environment is drawing investors back into the market and increasing confidence in bonds as a source of stable profits and a hedge against falling stock prices. Bond fund returns also appear to be becoming more competitive as banks begin to lower deposit rates.
“If the Fed moves ahead and cuts rates further, we will likely see a larger shift into bonds.The two main drivers of inflows this year are expectations for Fed easing… “[Investors]want high-quality bonds that provide diversification in times of stress,” said Kirsty Spence, fixed income portfolio manager at Capital Group.
More than half of the bond ETF inflows, or $55 billion, went to BlackRock and Vanguard. Their passive funds have been driving the sector’s rapid growth for many years. But active managers like Capital Group, JPMorgan and Janus Henderson have also benefited, with each posting at least $2 billion in quarterly net inflows to active bond ETFs.
“If there’s one piece of top news when you think about bond flows, it’s that it’s a much more democratic environment,” said Ryan Jackson, Manager Research Analyst at Morningstar.
Bonds were the only bright spot in the net inflows for BNY, which has been hit by outflows from across its asset management division. Chief Financial Officer Dermot McDonough said on Friday: “We are well positioned to accommodate further capital flows.”
Benefits from the return to fixed income include a wide range of strategies, not just core fixed income funds. The top active bond ETF this year in terms of inflows was Janus Henderson’s AAA-rated fund comprised of loan-backed securities. The company recorded $7.2 billion in capital inflows this year, with net assets reaching $13 billion, more than three times the amount from the previous year. It has outperformed nearly all of its ultra-short-term bond peers over the past three years.
“If anything, I think some of the deals we’re seeing are bigger and thicker,” said John Kirshner, head of U.S. securitized products at Janus Henderson. Ta. “A few years ago, people needed to be convinced that (investing in bonds) was better than cash.”
Financial managers said they expect capital inflows to continue, especially if the central bank’s policy rate stabilizes above the zero level seen before the recent spike in inflation.
“A more normalized and relatively high interest rate environment could push investors further back into bonds,” BlackRock CEO Larry Fink said. “There’s no question that money is moving.”
Bank of America analyst Craig Siegenthaler said he expects active bond flows to be “significantly stronger” in 2025 as short-term interest rates remain below long-term bond rates. Ta. “This really encourages investors to start moving along the (yield) curve.”
Additional reporting by Joshua Franklin and Stephen Gandel in New York
