Exchange traded funds (ETFs) tracking the various bond types available were on a roller coaster ride in the past few months but this hasn’t discouraged investors from looking into these fixed income markets.
Since September, fixed-income ETFs have been experiencing a wild ride, writes Paul Amery for IndexUniverse. Long-term government bonds saw a end-year rally and then a retraction. Corporate debt was on the decline in the fall, but investors still put money into the sector. Despite deflationary worries, investors are also attracted to inflation-protected debt.
Yield Curves. Long-term fixed-rate government bonds attracted lots of interest. The iShares Barclays 20+ Year Treasury Bond (NYSEARCA:TLT), which is down 18.1% year-to-date, increased 30% in the months of November and December. The rise in long bond yields thus created steeper government yield curves.
Corporate Bonds. Since last fall, the corporate bond sector, iShares iBoxx $ Invest Grade Corp Bond (NYSEARCA:LQD) is down 2.4% year-to-date, and has attracted investor inflows. This type of bond is more sensitive to steepening yield curves and to long-term default risks. Currently, iShares corporate debt funds offer gross redemption yields just shy of 10%. High-yield bonds have been attracting interest, too.
Emerging Market. The iShares JPMorgan USD Emerging Markets Bond (NYSEARCA:EMB), which is up 2.8% year-to-date, has dropped 30 points in October and November then later making up most of the losses. Falling commodity prices and the condition of the global economy resulted in higher default risks in the emerging markets. But now, commodity prices are stepping up and an optimistic economic outlook have boosted investor sentiments.
Inflation-linked. The low levels of break-even inflation rates in inflation-linked bonds compared to fixed-rate bonds have enticed investors. TIPS, iShares Barclays TIPS Bond (NYSEARCA:TIP) is up 2.3% year-to-date, holders would be rewarded at the expense of fixed-rate bond holders if there is any positive average inflation rate over the next 10 years.
Max Chen contributed to this article.