Investors Favor Bond ETFs as Experts Predict Higher Rates for Longer

Core CPI may bode trouble for the economy, experts say.

TwitterTwitterTwitter
ShubhamSaharan_white_bg
|
Reviewed by: Shubham Saharan
,
Edited by: Shubham Saharan

Fixed income exchange-traded funds have been a haven for investors this year, and the latest consumer price index report released Wednesday may give investors additional reasons to seek cover.  

A closely followed metric by the Federal Reserve, CPI, eased to 5% in March, falling below analyst expectations of 5.1%. Yet core inflation, which strips out volatile food and fuel costs, posted at 5.6% higher than a year earlier. That inched up from February’s 5.5%, notching the first acceleration in the figure since September.  

“Central bankers are likely drawing a collective sigh of relief as they see evidence of their policy decisions taking effect, including a notable slowing of rental inflation,” Andrew Patterson, senior international economist at Vanguard said in emailed comments to etf.com.  

“The underlying drivers of inflation are tracking with our expectations of a downward trajectory,” he added, “but that trajectory hinges upon the Fed recognizing that there's still more work to do.” 

Still, the acceleration in the so-called core inflation figures has some experts warning that the Fed may keep interest rates higher for longer.  

“This reacceleration/stickiness in core inflation despite the Fed tightening policy by close to 500 bps over the past year reiterates why interest rates need to stay higher for longer,” Gargi Chaudhuri, head of iShares investment strategy in the Americas said in emailed comments to etf.com. “The Fed’s mandate of 2% inflation is a distant dream, and interest rates have to remain somewhat restrictive till we see meaningful improvement in the trajectory of core inflation.” 

Amid such uncertainty, investors have fled to bond funds to hedge possible risks.  

Whipsawing markets, bank runs and back-to-back-to-back Federal Reserve interest rate hikes have resulted in investors rebalancing portfolios and shying away from risk. U.S. fixed income funds lured in nearly $44 billion in the first quarter of the year, according to etf.com data, nearly triple the $15 billion the asset class pulled in during the same period last year.   

Most of those funds have flocked to Treasury-bill linked funds, including the iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares 20+ Year Treasury Bond ETF (TLT),which collectively pulled in $12.4 billion year to date, etf.com data shows.  

 

Contact Shubham Saharanat[email protected]   

Shubham Saharan is a markets reporter at etf.com. Before joining the company, she reported for Bloomberg and the Financial Times. Saharan is a graduate of Barnard College of Columbia University.