Is the bond market still a safe haven?

00:00 Speaker A

The US war with Iran is putting bond market safe haven status to the test. BlackRock though says this cycle favors a more income-oriented exposure with ETF investments being a viable strategy in more volatile periods. So let’s talk to Steve Laley, BlackRock co-head of Bond ETFs. He’s joining me now for this week’s ETF report brought to you by Pimco. It has been interesting this year. What maybe walk me through this, Steve, because we have seen at least in the Treasury market

00:27 Speaker A

the Treasuries are now basically back to unchanged on the year as we’ve seen yields go up. However, bond ETFs are just like raking in the flows, right? We’ve keep seeing record numbers. It’s the biggest, you know, it’s also the biggest area of the ETF market, I believe in terms of flows recently. So like what’s the is that a disconnect or what’s going on there?

00:46 Steve Laipply

No, it it’s incredible. So we we started seeing this when rates normalized. Um so you you know, you go back to the tightening cycle in um 2021 22 and then it was off to the races.

00:55 Steve Laipply

What’s interesting though, this year, we are 40% ahead in flows than we were last year and last year was a record.

01:03 Speaker A

So, what like and it feels like that’s happening across the ETF space, but obviously especially acute in bonds. What is it about this year? What’s going on?

01:12 Steve Laipply

There there is a thirst for income um that is just unrelenting so far. So there are a couple things going on. If you look under the hood, it’s not quite as as clean as that. So, for example, um the majority of our flows this year have gone into Escov, which is our zero to three-month T- bill fund.

01:29 Steve Laipply

So it would be tempting to draw a conclusion from that like, ah, safe haven. Second, um biggest flow in Treasuries anyway is our broad um broad Treasury fund, Gov T.

01:40 Speaker A

across the

01:41 Steve Laipply

So there there’s a little bit of safe haven in terms of the front end of the curve, but then people are also allocating more broadly. You go down the stack, you’re going to see allocations then to multi-sector like the Ag, to Binc, um our uh active fixed income fund, and then you get into investment grade allocations. I would say the common theme though is quality. The up- and quality uh trade, the quality income trade, that is persisting.

02:02 Speaker A

Can I also ask too, is it also a factor of the absolute boom that we have seen in financial advice. In other words, you know, we’ve seen a huge increase in registered investment advisors and wealth managers, the wealth channel has grown. and like they need stuff to sell to their clients. I mean, it’s a little cynical, but like that also seems to be going on.

02:22 Steve Laipply

I think this has happily coincided with just an increase in investor awareness. So if you think about there’s a and and it is the investor base that um you know, we’re really seeing coming to the market. You guys are very familiar with this, the direct investor base, um really has discovered um ETFs and bond ETFs in particular. And so as an example, we’re seeing really significant flows into our iBonds uh suite, our defined maturity suite. Why?

02:44 Steve Laipply

Through all this noise, you pointed out the 10- year, right? If you look two years ago, the 10 year was at 430. You look at last year was at 415, but in the meantime, you’re pushing below 4%, you’re pushing towards 5%. What works in that environment? Laddering. People love just to lock in yield, write out the storm, and those defined maturity ETFs, the i bonds are perfect for that. And so investors are responding that way as well.

03:03 Speaker A

Interesting. Okay, so what do you think what are you sort of recommending? There’s what’s happening and there’s what you guys are, I mean, maybe they’re the one in the same. Maybe people are taking your recommendations, but especially given that we are in a war. Yeah. that we’re in a volatile time.

03:17 Speaker A

how, you know, and that there is that safe haven status usually, but it’s not that although it’s not quite working that way over the past couple weeks.

03:25 Steve Laipply

Yeah, I mean there’s there’s a lot of noise, right, with with energy prices, oil, um inflation expectations, etcetera. And so I I do think you have to have a view, right? And so if the if if it’s uncertain and you want to, you know, sort of wait and see, that’s going to be eskov. We’ve also seen flows into, we have a short dated inflation product ICPI. It’s a zero to one-year inflation product. We’ve seen flows starting to come into that as well.

03:47 Steve Laipply

More than likely because of the, you know, concern that that’s growing around inflation. We got some strong PPI numbers this morning. Um but you know, I think you have these short dated um cash like instruments which which are attractive. And again, if you’re like looking to just ride out the storm, laddering is a great strategy with iBonds. Um people continue to allocate to things like BNC, Bank, um just for that broad diversified income uh theme. So

04:08 Steve Laipply

there’s no magic formula. I think you do have to have have a view on this. But um there are ways to kind of write out the storm.

04:13 Speaker A

I I’m going to put you on the spot for just a second because you mentioned PPI and it made me remember that portfolio management was the biggest contributor to the increase in the services portion of PPI. I was looking at BLS about that. And I was trying to sort of figure out what’s going on there. Why, you know, so as somebody who’s in the business, what do you think is going on there?

04:33 Steve Laipply

I don’t know. Um that is interesting. I saw that too. but yeah, no, I don’t know. I mean, I think you mentioned earlier just this boom in in uh services of advice and I do think investors are getting much smarter at thinking about portfolios in general, right? What it’s not about, oh, I want to buy a fund or a ticker. It’s it’s more the sort of orchestra model. You know, how do they all play together um and you know, to get a really good result. We’re seeing a lot of conversations like that. So, yeah, people are interested in tickers, but they’re also interested in how everything can kind of come together in the right way.

04:59 Speaker A

holistic approach. The orchestra approach. I like that. I like that analogy. Thanks so much, Steve.

05:04 Steve Laipply

Thanks for having me.