(Source: ETF.com, data through 8/27/2015)
Day said that the current equities decline does not undermine the key reason for pursuing diversified bond exposure: the unprecedented divergence in central bank policy around the globe. China has just devalued its currency, and even though the chances that the Fed hikes rates in September have decreased, traders and Wall Street economists still think there is a fair chance the more hawkish members of the Fed win out sooner than many market pundits now expect.
The recent data on flows into bond funds shows the flight-to-safety mentality, with investors piling into short-term treasuries, but Day said that this data also revealed another reason to become more tactical with bonds on a global basis. In the last major market downturn of 2008, long-term treasury prices performed really well. Now, in the face of rising rates, that correlation is not showing up in bond returns.
In just-released monthly flow data from ETF.com, U.S. government bond funds were the only real "winner" in August, with $6.5 billion in net asset flows (ETFs as a whole only had $2.7 billion in net flows), and the bulk of those dollars landed in shorter-dated, high-quality government debt funds—the kind that offers the safety of Treasurys without too much interest-rate risk, ETF.com reported.
Mishra noted that EM companies (including many energy companies) have borrowed a lot in recent years, and now with China slowing down, rising political risks and prospects of higher interest rates in the U.S., EM asset managers may face sudden demand for redemptions from foreign investors. But, she added, "emerging markets governments are now much better prepared to withstand the sudden outflow of foreign capital, and I believe that chances of sovereign defaults are quite low."
Day said savvy bond investors know that short-term Treasuries won't be enough, nor will a U.S.-only bond universe. "You need to have something more tactical, and we don't have that many tactical managers in the bond space beyond [Jeff] Gundlach and [PIMCO's Total Return Fund] BOND." Day added that the best bond investors right now act more like global macro strategy managers and adding international bond exposure is a component of that approach.