Investors have been piling into U.S. Treasuries thanks to the recent rise in yields. For a lot of people, bond ETFs have provided a more accessible way to access the fixed-income market. In an interview with Yahoo Finance Live, BlackRock Global Co-Head of iShares Fixed Income ETFs Steve Laipply explains how there has been a "sea change of adoption" when it comes to bond ETFs.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
- According to data from BlackRock, some yields are seeing levels that they haven't seen since the financial crisis. And the aggressive rate hikes set by the Federal Reserve have unlocked a new generational opportunity. Now this includes in yields and in the bond ETF space.
Our next guest is finding that there is growing adoption of bond ETFs in the current market climate. As part of our ETF report brought to you by Invesco QQQ, let's bring in BlackRock Global Co-Head of iShares Fixed Income ETFs, Steve Laipply, to discuss more. Thank you for joining us this morning, Steve. So I want to first talk about this generational opportunity considering where we were during the financial crisis and really how much more upside you see ahead.
STEVE LAIPPLY: Well, it is pretty remarkable to think back over the last 10, 15 years. If you look at where we were on 10 years during 2020, compared to now, we were below 50 basis points. Now we're above 450 basis points. So that is a massive shift, the front end of the curve even more so with the Federal Reserve tightening policy aggressively here.
So what that means is that investors are able to completely retool their portfolios in ways that simply weren't available before. We've been able to look at taking risk off the table with equities and adding back in fixed-- think of risk, which, again, if you go back even three or four years, you can get more at the front of the Treasury curve than you could in high yield at the end of 2020.
So that's quite remarkable. And it just provides investors with degrees of freedom that they didn't have before.
- Yeah, it does feel like bonds are back in fashion, right, which is kind of a funny thing to say here. But given the yields that we have seen, to your point, sort of on the short end as well as on the 10-year, we've seen a lot more interest move in that direction. Is your expectation that these yields will remain pretty elevated for longer?
STEVE LAIPPLY: Well, that's what the Fed is telling us. And they keep reinforcing that message over and over. And they've been very aggressive about reinforcing it.
So I think that the data is supporting them up to this point. We've had stronger data than expected. There's a lot of discussion about the dot plots moving up. But there's also discussion about the role that the deficit is playing here and then, investors reassessing the overall term premium in the market for longer term bonds because of the deficit.
So there's a lot of crosscurrents going on here. But I do think we are unlikely to go back to the levels that we saw a few years ago.
Now there will be give and take, especially if we have a slowdown in the economy. You could see a retraced-- retracement at the long end of the curve, which-- I think, that speaks to some of the flows we're seeing. Despite the backup in yields, especially at the long end that we've seen recently, we still continue to get flows in the longer end of the Treasury curve.
So TLT are 20-plus. Treasury fund is still sort of the king of flows this year at $16 billion. We've taken in $40 billion overall into treasuries. And that's spread pretty much around the curve. But it is interesting to see those flows still coming into the long end of the curve.
- And when you look at the makeup of who's investing here, what are you seeing in terms of institutional investors versus retail investors?
STEVE LAIPPLY: It's a healthy mix of both. I do think that there is quite a sea change during the COVID volatility, The worst of it during February and March of 2020, we saw institutional investors who had been using bond ETFs to a limited degree.
But I think during that period of volatility when even treasuries were dislocated, we saw quite a lot of assets come off the sidelines from institutional investors into bond ETFs simply out of necessity. They were managing risk, navigating that market when the market pivoted back to risk on. It was much easier to leg back into the market through bond ETFs than it was the underlying, just like it was much easier to sell when things were risk off at the beginning of the onset of COVID.
So I think now as we stand here today, we have, I think, nine of the 10 largest global asset managers are now users of bond ETFs. Something like six or seven of the largest insurance companies now use bond ETFs. So it's been quite a sea change of adoption over the last few years.
Retail investors continue to discover, I think, the power of this tool. And leveling the playing field for bonds is much easier for them to access bonds with bond ETFs than it is individual bonds. And they continue to allocate based on that.
- So how do you think investors should be putting their money in the space, money to use in this space? I mean, what are you advising your clients in this environment?
STEVE LAIPPLY: Yeah, and this gets down to investor preference, as you might imagine. So right now, I do think that we prefer to stay sort of short and intermediate and high-quality fixed income. That being said, it is very, very hard to time the top-end rates.
And so what we have seen investors do again, just by virtue of the flows into something like TLT, investors are layering in longer term bonds almost as an insurance policy, if you will, against a potential slowdown in the economy. That's been talked about for months and months. We'll see if and when it arrives.
But we have seen investors sort of moving out on the longer end of the curve. The value is at the front end. But we've seen that healthy mix. I do think we prefer higher quality.
It is tricky in high yield right now with the slowdown being talked about. It's very tough to call a credit cycle if and when it does happen. So we like higher quality, staying short, intermediate on the curve.
- We appreciate you joining us this morning with your insights. A big thank you there to BlackRock Global Co-head of iShares Fixed Income ETFs, Steve Laipply. Thank you so much.
STEVE LAIPPLY: Thanks so much.