Bond ETFs Surge as Shorter Duration and Credit Offer Attractive Yields

SPEAKER_1 (0:00)

Let's discuss the latest in the bond market. Welcome in our next guest, JoAnne Bianco, partner, senior investment strategist over at Bond Blocks Investment Management. JoAnne, it's always nice to have you on the program. Thank you so much for your time. So, you're gonna be pretty busy because really, I think bonds are stealing the show at the moment. And I don't know, everyone I feel like at the moment is like, it's the good, the bad, the ugly, because you've got the resilient economy, you've got, I guess, the inflationary expectations and the ugly, I suppose you could throw the housing market in that bucket. I'm just wondering, at a time when fixed income is living up to its name, after a number of decades, you could argue where you see the biggest opportunities right now.

JoAnne Bianco (0:42)

Yeah. Well, where we see the biggest opportunities is we think that you have the potential to get greater income in a lot of areas, especially like corporate bond sectors, private credit, shorter duration emerging markets. Any area where you have the potential, you see elevated yields because of US Treasury rates, but you also have a still resilient economy supporting all these credit sectors, meaning that your forward returns can be attractive.

SPEAKER_3 (1:18)

JoAnne, you make an argument that income should be the primary driver of your expected fixed income returns, rather than trying to forecast where interest rates are going, which as we're starting to see, we did an okay job with this time, but it could get a little dice here as we go forward. Why is that distinction particularly important in this environment with this backdrop?

JoAnne Bianco (1:42)

Just because the longer you go out in duration in your portfolio, the more volatile your turns are. And so then in an environment like this, where you're seeing long-dated yields increase, I mean, we're at 19-year highs for the 10-year US Treasury. That is just translated into negative price returns on those securities. And so you're better off being in shorter duration sectors, just primarily because you're not dealing with that same interest rate risk.

SPEAKER_1 (2:20)

Yeah, it's interesting because when you think about, or at least talk to guests about whether they like duration at the moment, I was listening to a podcast that the folks over at Charles Schwab put out over the weekend, and they were arguing that the 10-year tends to peak closer to the final hike, not the first rate hike. And so some have been saying, I mean, they're waiting for it to get to 6% before it starts to look attractive. But at the end of the day, it is a competition for capital. So what is the biggest question you're being asked right now by clients?

JoAnne Bianco (2:50)

I would say that, well, we're getting a lot of questions. But what do we think the Fed's going to do? How many more rate increases do we think that they're going, or rate hikes do we think that they're going to make?

Do we think that they're going to get inflation under control with this activity? That's hard to say. And then they're just, they're definitely asking us for our recommendations and how they should position with this type of market volatility.

SPEAKER_3 (3:24)

I know, JoAnne, I mean, I'm looking at the inflow numbers for ETFs. The bond ETF inflows surpassing $460 billion were on track for another record year here. What is driving this continued shift that we're seeing in using the ETF wrapper to get exposure to fixed income?

JoAnne Bianco (3:41)

Well, they're a great way to get exposure on a liquid, transparent basis where you get daily liquidity, daily ability to trade, and you see holdings on a daily basis. So it's just some, and usually pretty economic fee structures for investors. So it's just something that has, you know, there's just a lot more interest in ETFs as a vehicle.

SPEAKER_1 (4:12)

And what are you seeing, JoAnne, right now as far as demand and appetite for sovereign debt versus corporate debt given all this issuance that seems to be giving the former a run for its money?

JoAnne Bianco (4:25)

Yeah, well, what we're seeing there, and so we have a shorter duration emerging markets fund, which has been one of our bigger areas of inflow, both last year and this year.

And so it's a good source of diversification for investors. There's attractive yields or income generation that they can get with this type of fund. And it's just something that versus all their developed market alternatives, it's something different for them.

SPEAKER_3 (4:57)

And JoAnne, I know we talk a lot, Sam and I do about private credit and how it's grown enormously as an asset class. I was looking through some of your offerings here. You have an ETF that offers some exposure through CLOs, the yield above 7%.