Investors Are Shying Away From Bonds. Here Are the Two Sides of the Trade

Source: CNBC

Is it worth buying into the bond market in 2021?

It appears investors have largely come up short in answering that question, with just $59 billion flowing into the bond market year to date as opposed to the $240 billion flowing into equities, according to ETF Trends.

"When we talk to advisors, what we hear overwhelmingly is they don't really want to own bonds at all right now if they can help it," said Dave Nadig, chief investment officer and director of research at ETF Trends and ETF Database.

U.S. Treasury yields have climbed this year but largely stabilized in recent weeks. Federal Reserve Chairman Jerome Powell said in March that it is "highly unlikely" that the central bank will raise rates this year.

"If you look at what people are doing in their equity portfolios, it looks like the rotation we would normally expect into a risk-off trade is just missing that core Treasury allocation," Nadig told CNBC's "ETF Edge" on Monday.

"Advisors tell me flat out they just don't think they're getting paid to take any risk, much less the duration risk baked into anything beyond the 2-year [Treasury rate] on the curve."

Launching a bond-based exchange-traded fund in this environment may seem bold, but the other side of the trade has its benefits, said John Hollyer, Vanguard's global head of fixed income.

Vanguard's actively managed Ultra-Short Bond ETF (VUSB) began trading on April 7 and just crossed $100 million in assets under management.

"We look at high-quality corporate bonds, which I think do a good job diversifying a portfolio," Hollyer said in the same "ETF Edge" interview. "It's not going to make or break a portfolio, but it is a good source of diversification and income."

The pace of the economic reopening, vaccine effectiveness and strong fiscal policy all have the potential to push the U.S. 10-year Treasury yield to 2%, but not much higher than that, Hollyer said.

"We really don't see inflation emerging as a major threat, and we think the Fed will continue to demonstrate the patience they've shown so far before tapering or tightening," he said.

"We would say that a balanced portfolio with some holdings in bonds is going to achieve some better efficiency in light of potential for equity volatility."


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