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Bond ETFs Emerging Popular to Start 2023: Here's Why
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Investors are pouring billion into bonds to start 2023. iShares iBoxx USD High Yield Corporate Bond ETF (HYG - Free Report) attracted about $2.54 billion so far this year (as of Jan 19, 2023) and earned the top spot in the most fund generator’s list. Six top asset generators were bond funds in the top-10 list.
The fund HYG was followed by iShares 20+ Year Treasury Bond ETF (TLT - Free Report) ($2.46 billion of inflows), iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD - Free Report) ($2.40 billion of inflows), iShares JP Morgan USD Emerging Markets Bond ETF (EMB - Free Report) ($1.58 billion of inflows), Schwab Short-Term U.S. Treasury ETF (SCHO) ($1.55 billion of inflows) and iShares Core U.S. Aggregate Bond ETF (AGG - Free Report) ($1.50 billion of inflows).
Reason for Investors’ Love for Bonds
Risks for Economic Slowdown
The rotation from stocks to bonds came on the back of recession fears and investors are seeing bonds as safer investments during economic downturns. As the global economy is struggling with high inflation, hawkish central banks, rising rates, the continued war in Ukraine and a slowdown in China, a deep economic crisis is likely this year.
Fed Rate Hikes to End in 2023?
The Fed has hiked rates several times in 2022 and but end of rate hikes could be seen in 2023 as inflation has kind of peaked. Overall, investors are growing more confident that interest rates might peak in 2023 without hurting many lower-rated companies’ capacity to repay debt. Hence, junk bonds’ default risk is still low-to-moderate.
Corporate Recession Not Likely in 2023
Meanwhile, rising rates haven’t marred the outlook for corporate profitability as much as some investors had feared. Companies are laying off workers as a cost-cutting measure. Per the Earnings Trends issued on Jan 18, 2023, S&P 500 earnings are projected to grow 4.3% in 2022 and 1.7% in 2023. Hence, economic recession (if at all happens) does mean corporate recession whatsoever.
High Yields Offered by Junk Bonds
Plus, policy tightening in the United States has so far been so aggressive that bonds are offering attractive yields. The benchmark 10-year U.S. treasury yield was 3.48% on Jan 20, 2023 while junk bond ETF iShares IBoxx High Yield Corporate Bond ETF (HYG - Free Report) yields 5.13% annually.The weighted average maturity of the fund is 5.10 years.
The investment-grade bond ETF LQD yields 3.15% annually. The weighted average maturity of the fund is 13.08 years. iShares Core U.S. Aggregate Bond ETF (AGG - Free Report) yields 2.32% annually. iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB - Free Report) yields 4.81% annually.
China’s Attempt to Save Its Ailing Real Estate Sector
China’s junk bond market has suddenly become popular as China’s property market crisis made the prices of their bonds cheaper on the dollar. Since Beijing ultimately stepped in to control the crisis, many started betting on the cheaper assets.
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Bond ETFs Emerging Popular to Start 2023: Here's Why
Investors are pouring billion into bonds to start 2023. iShares iBoxx USD High Yield Corporate Bond ETF (HYG - Free Report) attracted about $2.54 billion so far this year (as of Jan 19, 2023) and earned the top spot in the most fund generator’s list. Six top asset generators were bond funds in the top-10 list.
The fund HYG was followed by iShares 20+ Year Treasury Bond ETF (TLT - Free Report) ($2.46 billion of inflows), iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD - Free Report) ($2.40 billion of inflows), iShares JP Morgan USD Emerging Markets Bond ETF (EMB - Free Report) ($1.58 billion of inflows), Schwab Short-Term U.S. Treasury ETF (SCHO) ($1.55 billion of inflows) and iShares Core U.S. Aggregate Bond ETF (AGG - Free Report) ($1.50 billion of inflows).
Reason for Investors’ Love for Bonds
Risks for Economic Slowdown
The rotation from stocks to bonds came on the back of recession fears and investors are seeing bonds as safer investments during economic downturns. As the global economy is struggling with high inflation, hawkish central banks, rising rates, the continued war in Ukraine and a slowdown in China, a deep economic crisis is likely this year.
Fed Rate Hikes to End in 2023?
The Fed has hiked rates several times in 2022 and but end of rate hikes could be seen in 2023 as inflation has kind of peaked. Overall, investors are growing more confident that interest rates might peak in 2023 without hurting many lower-rated companies’ capacity to repay debt. Hence, junk bonds’ default risk is still low-to-moderate.
Corporate Recession Not Likely in 2023
Meanwhile, rising rates haven’t marred the outlook for corporate profitability as much as some investors had feared. Companies are laying off workers as a cost-cutting measure. Per the Earnings Trends issued on Jan 18, 2023, S&P 500 earnings are projected to grow 4.3% in 2022 and 1.7% in 2023. Hence, economic recession (if at all happens) does mean corporate recession whatsoever.
High Yields Offered by Junk Bonds
Plus, policy tightening in the United States has so far been so aggressive that bonds are offering attractive yields. The benchmark 10-year U.S. treasury yield was 3.48% on Jan 20, 2023 while junk bond ETF iShares IBoxx High Yield Corporate Bond ETF (HYG - Free Report) yields 5.13% annually.The weighted average maturity of the fund is 5.10 years.
The investment-grade bond ETF LQD yields 3.15% annually. The weighted average maturity of the fund is 13.08 years. iShares Core U.S. Aggregate Bond ETF (AGG - Free Report) yields 2.32% annually. iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB - Free Report) yields 4.81% annually.
China’s Attempt to Save Its Ailing Real Estate Sector
China’s junk bond market has suddenly become popular as China’s property market crisis made the prices of their bonds cheaper on the dollar. Since Beijing ultimately stepped in to control the crisis, many started betting on the cheaper assets.