BlackRock reports that bond ETFs have gone through USD600 billion as investors use them to access markets in the face of global uncertainty caused by the shock Brexit vote and fears of inflation.
The report from Stephen Cohen, Head of Fixed Income Beta at BlackRock finds that the strongest theme driving global demand for bond ETFs remains the search for yield.
“Investors poured funds into emerging markets exposures as markets recovered from the Brexit vote, helped by more hopes of central bank easing. USD276 million into the EMEA-domiciled IEMB in June alone.
“The surge in demand for European corporate bond ETFs continued into the second quarter, following the ECB’s March announcement of the corporate bond purchase program. We saw USD2.3 billion inflows into the largest five iShares Euro corporate bond products (IEAC, IBCX, IHYG, IE15 and IEXF) during the quarter, and USD4.4billion year to date.
“European government bond yields moving further into negative territory after the Brexit vote also drove greater demand for US investment grade and Euro corporate ETFs. Investors appear to position themselves for a rise in US inflation on the back of consistent US growth and continued easy monetary policy by increasing exposures to Treasuries.”
Looking forward, Cohen says: “We expect to see the demand for US-based corporate bond ETFs among European investors to rise, given government bond yields in the US are not as suppressed as they are in Europe. We also expect to see investors pay more attention to their currency exposure in light of recent volatility in currency markets.
“As bond ETFs are increasingly used as a financial instrument within portfolios to transfer risk quickly, investors are asking for more granular exposures. I expect we’ll start to see even more innovation in the industry.”
