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Why Investors Poured Money into Global Bond ETFs in Q2

Sanghamitra Saha

Be it equities or bonds, market complacency remained at extremely high levels and volatility is hovering at exceptionally low levels. Bank of America’s MOVE Index, which measures volatility in the U.S. Treasury market, plunged to 46.9 at the start of August, as per Bloomberg.

Thanks to this euphoric sentiment about the bond market, global bond ETFs saw remarkable inflows in the second quarter. Data from BlackRock, showed that global net inflows into bond ETFs ballooned from $25.8 billion to $43.3 billion year over year in Q2. BlackRock’s own iShares brand of ETFs raked in about $21 billion in Q2. Kudos go mainly to emerging market (EM) debt passive products as global EM bond ETFs realized about  $7.5 billion of net inflows in the second quarter (read: Forget Active, Passive EM Bond ETF Hits $10 Billion in Assets).

Though the Fed has enacted two rate hikes this year, the benchmark U.S. Treasury yields are broadly at lower levels. Plus, the U.S. central bank is unlikely to be aggressive on policy tightening in the coming days on account of still-subdued inflation. So, the Fed fear was not that heightened in the coming days when it came to EM investing.

Notably, U.S. benchmark Treasury bond yields were in the range of 2.14% to 2.42%, with an average of 2.26%. This came way lower than the yields offered by EM bond ETFs. Notably, bond yields in EM ETFs remain in the range of 3.51-5.53%.

Going beyond the U.S., several developed economies are practicing an ultra-low monetary policy, which pushed investors to EM debt ETFs. Though QE wrap-up talks by the ECB lately gave a boost to bond yields in the Euro zone, the benchmark bond yields are tremendously low compared to EMs. As of August 9, 2017, Euro area yield curve showed a 0.454% on 10-year AAA -rated bonds (read: What Makes EM Bond ETFs Attractive?).

Plus, overall investing sentiments remained pretty upbeat in the EM world. EM economies are a lot more protected from Fed-tightening shocks this time than they were in 2013, which is remembered for taper tantrum. And since fixed-income securities are less risky than equities and offer solid yield, investors are keener on these products (read: EM ETFs: What You Need to Know Before Investing).

Inside ETF Inflows

iShares JP Morgan USD Emerging Markets Bond ETF EMB yielding 4.58% annually, attracted $2.74 billion in assets. PowerShares Emerging Markets Sovereign Debt Portfolio ETF PCY yielding about 4.95% saw inflows of $562.5 million, Vanguard Emerging Markets Government Bond Index Fund VWOB, yielding about 4.54% annuallyfetched about $40.2 million in assets, as per etf.com (see all Emerging Market Bond ETFs here).

Trend in Q3

BlackRock noted that the fervor for EM debt investing faded at the start of Q3, as the Fed talked about normalization of the monetary policy and may enact one more rate hike this year. Global economic improvement actually calls for such tightening moves.

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ISHARS-JPM EM B (EMB): ETF Research Reports
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